Oil & Gas - Energy - Commodities - Resources (OILBRENT)

[Timothy Smith]

$MHR - Bottom Buy IMO - I see this recent action resulting as tremendous upside for $MHR buyers in this range, all in my opinion of course. The incident of course sent the stock into a downward spiral.

MHR remains a fast growing oil and gas exploration and production company with projects in the Eagle Ford and Marcellus Shale areas. While the company has been rapidly growing production, the consistent profits that some investors have hoped for have yet to arrive.

That is primarily because management has been focused on revenue growth. The shorts seem to be focused on this and the fact that the company recently announced it would delay the filing of the annual 10-K report beyond the extended due date of March 18, 2013.

The company said it: "has identified certain material weaknesses in its internal controls over financial reporting in connection with its (I) lack of sufficient qualified personnel to design and manage an effective control environment, (ii) period-end financial reporting processes and (III) share-based compensation. Magnum Hunter has implemented, and continues to implement, measures to address these weaknesses in the future."

These types of issues could create additional risks for investors, however, it is not uncommon for a fast-growing company to experience these kinds of "growing pains". Shorts might be ill-advised to read too much into the lack of consistent profits and the delayed 10-K filing because Magnum Hunter has a management team that includes CEO Gary Evans.

He has a history of producing solid returns for shareholders and his last oil company was acquired by Cimarex Energy (XEC) for approximately $2.2 billion in 2005. Some investors believe he is positioning Magnum Hunter for rapid growth, which could then lead to profits, and possibly the goal of having this company being bought by a larger firm.

If that is the case, shorts have plenty to worry about especially since this stock has made large moves to the upside in the past. If the company files the 10-K with no other issues, investors could view this as a positive upside catalyst. This stock was trading around $4.20 in March but now goes for about $3.30 per share.

According to Shortsqueeze.com, there are about 34.3 million Magnum Hunter shares short. Based on average trading volume of around 4.6 million shares per day, it could take over 7 days worth of volume for shorts to cover. That level of short interest could be enough to trigger a short-squeeze, especially on any better than expected news from the company.