GreenHunter Fights Back

 | Oct 17, 2013 | 1:00 PM EDT
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On Wednesday after the close, GreenHunter Resources (GRH) which provides water systems to oil and gas producers, filed an 8-K, which is basically a manifesto from Chairman Gary Evans, which is also the company's largest shareholder, holding 48% of the stock. Evans and GreenHunter's management team have been quite irked by negative commentary on the company on the website Seeking Alpha.

This particular Seeking Alpha columnist is short GreenHunter, and while he discloses this position (just as I disclose my positions my clients' long positions), two decades of doing this have taught me that short-sellers are much more dependent on rumor and innuendo than those who play long.

Evans- -- who has worn cowboy boots in every meeting I've had with him -- comes out guns blazing in the shareholder letter. He refuted several of the claims in the Seeking Alpha articles (there have been three articles advocating shorting GreenHunter), and his most interesting points were:

  1. GreenHunter is seeking capital actively and persistently, and Evans predicted success in this endeavor. Evans and interim CEO Jonathan Hoopes were together on the West Coast two weeks ago when I saw them at the IPAA's OGIS conference in San Francisco. They might as well have been wearing sandwich boards reading, "Will inject briny frack water for food ... or $25 million or so." I expect details of a material capital raise to be announced soon.
  2. GreenHunter will be cash-flow positive for the third quarter. My model showed this, but it's always reassuring to hear from management, especially after a first half that was affected by a host of non-recurring factors.
  3. Evans described GreenHunter common stock as significantly undervalued (his emphasis). He said the same thing about Magnum Hunter Resources (MHR) when it was trading at $2.37 in April. Magnum Hunter closed yesterday at $7.57.

My work in the energy sector has unearthed three gems this year: Gastar Exploration ((GST), up 277% year to date), Magnum Hunter (up 90% YTD) and Miller Energy Resources ((MILL), up 106% YTD.) 

My firm invests mainly in the preferred stocks of these companies, but a robust common share performance is usually indicative of improving fundamentals. Thus, I believe GreenHunter's preferreds (GRH-C) -- which currently trade at a 22% discount to face value and yield 13.1% -- represent an attractive value for investors looking for both income and capital appreciation.

The three companies I mentioned earlier all had significant short positions when my firm bought them.

In Gastar's case, it was the overhang from a lawsuit against Chesapeake Energy (CHK), which was subsequently settled very much in Gastar's favor.

Magnum Hunter had internal control issues which led to the firing of PricewaterhouseCoopers as its auditor; things have run smoothly with BDO installed as auditor and a new in CEO place.

The market simply didn't believe that Miller Energy's Cook Inlet wells could be rehabilitated to produce enough oil to support that company's heavy debt load. The wells are already exceeding expectations, and production is forecast to increase another 50% by the end of April 2014.

Short interest in GreenHunter has risen threefold since April and now represents almost 11 days' worth of average trading volume. The roadmap to a short-squeeze-generating financial rebound is less obvious at GreenHunter because, unlike Gastar, Magnum or Miller, it does not produce hydrocarbons. Instead, it services the companies that do, mainly through its network of salt water disposal wells. The success of its shale-drilling customers is trickling down to GreenHunter, and that will show up in its third-quarter results. Though those results won't be reported until mid-November, the initial internal read on them is obviously strong enough to justify Evans and Hoopes' Excellent Capital-Raising Adventure.

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