Miller Energy Strikes Oil, Literally

 | Sep 05, 2013 | 10:30 AM EDT  | Comments
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The "action" in shares of Miller Energy Resources (MILL) has been compelling of late. The shares have risen more than 20% in the last five trading days.

Simply put, they've struck oil, and it is flowing at a much higher rate (more than 2,000 bbls/day) than the Street had anticipated. Their properties in Alaska's Cook Inlet have moved ahead of the curve and their well rebooting -- "sidetracking" --process worked wonders with the first well, has just been completed on a second well, and now is being effected on a third well.

So, I have been buying Miller Energy for client accounts, especially today, even though -- since it doesn't pay a dividend -- it's not technically a "Portfolio Guru" security. I am harvesting some income by writing out-of-the money call options, but with the stock trading @ $6.86, I've already had to buy back some $7.50 strike February 2014 calls to "re-write" $10 strike February 2014 calls.

It is possible to be too conservative, and Miller common is now in the position of "buy now, ask later." And the "I missed it" thesis isn't as valid here, since their 4Q oil production is totally based on performance of what are essentially new wells.

The key is that Miller's common shares have been so heavily shorted. With 32 days' worth of average trading volume and 35% of the float shorted as of the last reporting period (Aug. 15) this is acting as rocket fuel for Miller Energy's advance: a classic short squeeze.

At the end of the day, Miller Energy's robust oil production is disproving the shorts, but digging further, the reasons Miller Energy shares were so heavily shorted are the reasons that their financial performance is improving markedly.

  • They have a large amount of debt at high interest rate (18%) with their PE partner Apollo. Yes, high debt levels can be scary, but the leverage inherent in such a scenario makes the returns for the (relatively) small equity slice that exists that much greater.
  • Forest Oil had huge problems drilling on the same acreage in the early 2000's and Miller Energy is using ex-Forest employees, led by Chief Operating Officer David Hall, to drill in the Cook Inlet. But the naysayers ignored the fact that Forest's efforts confirmed there IS oil in those wells (originally drilled in the 1960s.) They just couldn't figure out how to extract it profitably.  Miller has...clearly Hall and company. learned from past mistakes.

The future is truly unwritten, but Miller Energy's will not be untold. Miller management will be presenting at three conferences in the next month, and investor attention will be laser-focused on the results from three wells:

  • RU-2A -- has been pumping over 1,300 boepd
  • RU-1A -- started at over 700 boepd and the site team is conducting further analysis -- I expect a steep learning curve here
  • RU-5 -- the drilling rig has been moved to RU-5 and drilling is underway.

So, as of its last release on Aug. 26, Miller announced production of 2,150 boepd from its Osprey platform and if management indicates during its public appearances that production is materially higher than that rate as the new wells ramp up....then I would expect Miller Energy stock to go nuts...or more nuts than it already has. 

One should never fight the tape, and the momentum here justifies a buy-high and sell-higher tactic, which is obviously not my usual method of operation. I am also looking to add to positions in Miller's Series C preferreds  (MILL.C), which, are still trading at a discount to face, and become less risky as oil flows out of their Alaskan wells at rapid rates.

So, it's a solid story, and while I don't usually "chase" stocks, I have been very aggressive today, with some protection from call writing. I'll pick up more MILL.C as the next quarterly payment approaches (Dec. 1), but for now chasing the common is the way to play it.

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