GreenHunter Still Needs Capital

 | Oct 02, 2013 | 12:00 PM EDT  | Comments
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Reports of the demise of GreenHunter Resources (GRH) apparently were exaggerated, as the shares rose from just over $1.00 Friday to close at $1.46 Monday.

What was the catalyst? Management boosted 2013 revenue expectations in a press release Friday. They followed with a bullish presentation Monday at the Independent Petroleum Association of America's OGIS Conference in San Francisco.

The "delta" in revenue expectations was largely driven by strong business at the company's south Texas salt water disposal wells. But the bulk of this company's revenues -- and growth opportunities -- are still occurring in the Marcellus shale area of West Virginia, Pennsylvania and Ohio.

Trucking the briny residual water from fracking wells and depositing that into an underground injection well is an attractive, and necessary, task in all shale-drilling regions. But GRH is seeing the best returns from investing in wells in Appalachia. GRH is also seeing much interest in its MAG-Tank above ground water holding system, which is designed to withstand the tough terrain of Appalachia.

Management noted that it expects robust business to continue in 2014. It expects 2014 to show margin expansion at the earnings before interest, taxes, depreciation and amortization level. This is after what will likely be a flat EBITDA performance in 2013.

GRH is still turning away business at its eight salt water disposal wells in the Marcellus, and the company does not have the spare cash to fabricate additional MAG-Tank panels. Capital is needed and GRH took a first step in that direction two weeks ago with a $3.2 million private offering of its Series C preferreds. Management seems to want 10x that amount, though, and the bullish news on revenues makes the story an easier sell to potential investors.

I believe GreenHunter will execute a much larger capital raise in the near future. GreenHunter management noted at the OGIS conference that issuance of common equity is not a viable financing tool in their opinion until the shares hit at least $2.25. I expect a more creative capital increase, perhaps involving the mezzanine layer (preferred stock) of the capital structure.

As the market moves its focus on GreenHunter from short-term "can they pay their bills" issues to focus on their true growth potential, I believe the Series C preferreds will shed their 25% discount to par value. I used to work for a firm that would require analysts to list a Single Best Idea, and GreenHunter's Series C preferreds and their 13.5% current yield fit that bill for me now.

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