Checking In on Two Energy Micro-Caps

 | Dec 01, 2013 | 6:00 PM EST  | Comments
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Stock quotes in this article:

mill

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grh

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gst

I'll be attending the LD Micro Conference next week in Los Angeles. The micro-cap space is rife with opportunities and risk, of course -- and the conference will have companies that operate in businesses as diverse as recycling motor oil to those that operate Hooters restaurants in foreign countries.

Here at Portfolio Guru, LLC, my eyes are always on the prize, and two of my favorites -- Miller Energy Resources (MILL) and GreenHunter Resources (GRH) -- will be presenting at LD. Micro. I have run through the bull cases for both stocks many times in my Real Money space, so I'll spare readers the rehash.

As the calendar is about to flip, it's time to look at the driving factors for 2014. So, when I meet privately with management teams from Miller and GreenHunter, I'll be asking them (politely, of course) the following questions:

GreenHunter

Third-quarter revenue was well ahead of expectations, but what's the outlook for 2014? GreenHunter management has guided toward a doubling of capacity for saltwater disposal well (SWD) by the end of next year, but all signs point to a much quicker expansion. So if 2013 sales finish around $40 million, or around $10 million per quarter, does that mean the exit rate for 2014 should be $80 million, or $20 million per quarter? Experience has taught me that revenue guidance entails many moving parts. But if, after posting 100%-plus sales growth in the third quarter, GreenHunter is comfortable with 100% growth in its revenue run rate for 2014, this stock is wildly undervalued.

What is the status of financing? GreenHunter is just not generating enough cash flow internally to fund all of its attractive expansion projects -- a very common situation among high-growth companies. A few weeks ago, the company announced a letter of intent to secure $35 million in second-lien financing. So details are pending, and I hope I'll get some next week. I'll be interested in such things as financing cost, which wells will be encumbered by the liens and where the money will go when received.

Miller Energy

After a rollercoaster November, Miller Energy stock is once again sitting near a yearly high.

Miller's extremely volatile share-price performance has been driven by results from each newly spudded well, so the obvious question is: What's the outlook for December? The company recently moved its drilling rig about 30 feet from Sword #1 Well to a legacy well in its West McArthur River Unit. I don't believe for a second that an exploration-and-production company's intrinsic valuation should change based on every data point. However, I do have access to real-time quotes, and Miller's stock chart is a living representation of the market's guess at the performance of its next well. So that has to be the first question.

The second question is the same one as with GreenHunter: How will it finance all this growth? Miller has predicted 50% growth in production from calendar year-end to April, the ends of its fiscal year. It is still unclear to me how the firm will finance that growth and buy out private equity sponsor Apollo and its 18% financing -- Miller management's stated goal. Miller is poised to dominate the Cook Inlet near Alaska, but in order to take that next step, it needs to find "big boy" financing. That is, it requires solid, covenant-heavy long-term, fixed rate paper, as opposed to preferred shares, which are generally "covenant-lite." That's the final step, and I am anxious to find out when that's expected to occur.

One final presenting company of note: Torchlight Energy (TRCH on the pink sheets). I haven't mentioned this stock before, but the company's main play is in the same formation as Portfolio Guru favorite Gastar Exploration (GST): the Hunton Limestone in Oklahoma. In addition, both companies are using the same operator, Husky Ventures, for their wells. Gastar knocked the cover off the ball with the sixth well in its Hunton play (Mid-Con 6H) and Torchlight actually uses Gastar's results slide as in its corporate presentation as an indication of local results. So a production update from Torchlight will be very useful.

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