GreenHunter Has a Bright Outlook

 | Jul 16, 2014 | 5:00 PM EDT  | Comments
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I had a private conference call today with GreenHunter (GRH) Chief Operating Officer (COO) Kirk Trosclair and Assistant Vice President of Investor Relations Melissa Pagen. The company's shares have risen 64% in the past month and 171% over the past three months, so it was an opportune time to check in.

Scheduling the call took some finagling because the company is extremely busy these days. Drilling activity in the Marcellus/Utica region is increasing rapidly, and based on the geology, disposal wells in that area can handle far less input per day than in other shale-drilling areas. So while they are running full-out right now, the shares are clearly moving on what the company could do in 2015-16.

Now:

Business is indeed brisk and Trosclair is confident in the company's revenue guidance of $36 million to $38 million for 2014. Capacity additions are obviously lumpy because salt water disposal (SWD) wells need to be converted/drilled and there is also a required permit process. Trosclair noted that GreenHunter will see a big bump in capacity during the fourth quarter, with three wells (two conversions, on new-drilling) scheduled to come online at almost the same time in mid-December.

Profitability is maintained, as Trosclair noted GRH is currently running at a positive EBITDA, matching the results in the first quarter. GreenHunter Environmental Services is seeing huge interest from customers as they look for a "one-stop shop" for normal--and abnormal--environmental fault-prevention/problem-containment issues.

GreenHunter Hydrocarbons is working on converting tanks on GRH's existing New Matamoros terminal on the Ohio River to handle condensate shipments. Trosclair expects that condensate transloading to commence during the fourth quarter.

Barging has cleared one of the last remaining hurdles. Trosclair said that the U.S. Coast Guard has agreed not to designate wastewater from hydraulic fracturing as  hazardous material (HAZMAT). The exact definition of "shale-drilling wastewater" as a non-hazardous material is still being finalized, and Trosclair noted that the last hurdle remaining is congressional action.

Later:

All this growth will require a capital infusion, and I believe that the improvement in the prices of both the common stock (GRH) and the company's lone existing preferred (GRH-C), makes a capital raise much more feasible. The current yield on GRH-C has dropped from 14% six months ago, to the current rate of 9.72%. GRH-C is at its authorization and cannot issue any new capital. However, I believe management would be willing to pay to support the new SWDs, the condensate handling and the barging.

GRH has finished its due diligence on creating an master limited partnership (MLP), and is now awaiting approval from the Internal Revenue Service (IRS). The ever-efficient IRS has halted private letter rulings (PLRs) on MLPs for now, and Trosclair has been told that process could take two to four months. So, it's a wild card, but clearly GreenHunter management would like to drop some or all of its assets down into an MLP to enjoy the tax benefits. (The assets included and the general partner/limited partner split will remain unknown until the company gets a favorable PLR from the IRS.)

Further Down the Road:

GreenHunter will not be required to make any capital expenditure for its three-tier pipeline system project with Major Pipeline. Major is laying the pipe, and GreenHunter is providing the volume. (Trosclair confirmed that to me on our call.)

So, what will GreenHunter look like in 2015? The company will have much more capital, at least three more SWDs and an active barging/transloading/trucking effort for condensate and wastewater. By my estimation, this would produce an annual revenue base in the mid-$60 million range.

What will GreenHunter look like in 2017? With its pipeline up and running, GreenHunter starts to look like Magnum Hunter's (MHR) Eureka Hunter pipeline business. GreenHunter's CEO (he's also Magnum Hunter's CEO), Gary Evans, has meticulously built Eureka Hunter from the ground up into a pipeline that will soon carry one trillion cubic feet of gas per day.

Evans has stated repeatedly that he has received offers to buy Eureka Hunter that would value the whole at $1 billion. If GreenHunter, with its current market cap of $96 million, can make solid progress toward a Eureka Hunter model, then, clearly, the sky is the limit.

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