Drilling Down to the Micro Level

 | Jun 24, 2014 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

grh

,

hiit

,

celp

To finish up my trilogy on frac water management, I will drill down to the micro level. (You can read the first two parts here and here.) A few financial figures from the two players I mentioned in yesterday's column -- GreenHunter Resources (GRH) and HII Technologies (HIIT) -- show that the business is not only growing rapidly at the drilling level, but also for these two water management companies.

  • First-quarter revenue growth at GreenHunter Resources was 79%, and HII Technologies produced 188% growth.
  • For 2013, GreenHunter Resources produced $25.7 million in revenues, 52% year-on-year growth, and HII Technologies produced $14.5 million in revenues versus under $2 million in 2012.
  • In the first quarter, GreenHunter Resources increased its daily disposal volume in its core Appalachia salt water disposal wells (SWDs) by 97%, year-over-year, to 927,000 barrels. HII Technologies' growth is best registered in master service agreements (MSAs), and the company added seven MSAs in the first quarter and now has over 50.

These are two solid fundamental investments. I am just getting to know HIIT, but my initial read is that it is undervalued at its current share price of about $0.70 per share. But if you have access to stock quotes, you are likely waiting for me to explain GRH's meteoric rise in the last three weeks as well as the jump in value of GreenHunter's Series C preferreds to near par after languishing at $0.75-$0.80 on the dollar for a year.

I own GRH for my Mad Money clients and GRH-C is our single largest holding at Portfolio Guru, LLC. I love GRH's positioning in the water management business but I also loved the business three weeks ago when the common stock was trading at just over $1 per share vs. Monday's close of $1.82.

What's going on? Management has spoken several times about their long-term goal of converting GreenHunter's operating assets into a master limited partnership (MLP). There is a precedent there as Cypress Energy Partners (CELP), whose main business is saltwater disposal (SWD), had its initial public offering (IPO) in January. GRH is much smaller than Cypress, and nothing concrete has been announced, but "whispers" do move stocks.

I also believe the market is awaiting news on the approval of GreenHunter's Ohio River barging program. On the company's mid-May conference call, GreenHunter COO Kirk Trosclair threw out a guess of "about 30 days" until the U.S. Coast Guard (USCG) gives its approval. That date has passed, and, as I mentioned in yesterday's column, nothing has yet been announced regarding USCG approval of that program.

I have communicated with Trosclair several times in the last two weeks (I keep in touch with management members of all PG, LLC portfolio companies) and he has indicated that business remains strong in GreenHunter's core area of focus, the Utica shale plays in Ohio and West Virginia. That is reassuring, but not surprising. If there is "something going on" at the corporate level at GreenHunter, it is obviously not a subject I would discuss with Trosclair.  

But somebody, somewhere, thinks something is going on with GreenHunter and that leads to the question, "Should I sell it?" No! That's what I would call "panic profit-taking," and it is represents the worst in human nature and the ease of electronic trading.

I'll be holding GRH and still enjoying the monthly dividends from GRH-C. Meanwhile, I will run the numbers on HIIT with an eye toward expanding my firm's exposure to the water management end of hydraulic fracturing.

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