Miller Offers True Upside

 | Dec 26, 2013 | 6:00 PM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

mill

,

gst

,

xom

Miller Energy Resources (MILL) is the subject of constant speculation and quite elevated short interest, but a piece published this week on another website -- largely based on quotes from an asset manager with a large short position in MILL -- was so full of errors that I felt the need to refocus the debate on the facts. Miller shares have risen 76.8% this year, but it's not about gloating, I just want to correct the inaccuracies in that particular article.

According to this article, Miller must somehow find a way to come up with $75 million by the end of January in order to avoid loan-shark interest rates (approaching the 20% mark) on every bit of the bank debt that the firm currently owes. First, Miller has no bank debt. The $75 million outstanding is a loan from Apollo Investment Corp., which is a private-equity firm, not a bank. That is a huge difference.

Second, that $75 million loan is not due at the end of January. In fact, Miller's line of credit with Apollo matures in June 2017. Miller borrowed $20 million from Apollo at a much lower interest rate (9% vs. 18%) in August and if Miller does not repay that amount by the end of January, then the interest rate on that tranche rises to the 18% due on its original $55 million drawn from Apollo. Essentially, the extra $20 million was a "tide me over" until further outside financing could be arranged.

Third, Miller wants bank debt. That is what this article and so many others seem to miss. Debt in and of itself is not a bad thing, and the companies that have "killed it" in the energy sector this year, such as Portfolio Guru favorite Gastar Exploration (GST) (up 446%, year-to-date), have been consistently raising capital and immediately putting proceeds into more drilling activity.

Miller's management mentioned their desire to enter into a revolving credit line on their recent conference call, and coincident with their earnings report, released an interim reserve report showing Proved Developed Producing reserves of $360 million. That was clearly a signal to potentially interested banks that they would be seeking financing in that neighborhood.

Raising $360 million would allow the company to complete its fiscal-year (April 2014) capital budget of $297 million, which includes $65 million for the North Fork acquisition. It would also allow it to buy out Apollo and its high cost financing. That expensive credit line was necessary when Miller was an "idea" -- but Miller is now producing oil. That's the second part of the article that is troubling:

"The gross production numbers are not big – they're tiny – and the company is still cash-flow negative (from operations combined with necessary capitalized investments), so it has to keep selling this story about its monstrous reserves

If you are looking for the next Enron, look elsewhere, because the state of Alaska does a great job of tracking oil production within its borders. These figures confirm that Miller is indeed producing oil (Miller's production is listed in the Redoubt Shoal and W McArthur River rows) -- and not in a tiny amount.

The other issue not mentioned in the article is the state of Alaska's tax credit program (ACES), which grants oil producers rebates for well-lease expenditures (40%) and allows rebating of 25% of first-year operating losses. This is key to Miller's strategy. The company is getting much of its initial investment back from the state. So focusing on the amount paid out in capital expenditures (obviously, there is a lag between drilling and receiving the credits) really understates Miller's true cash flow. Miller CEO Scott Boruff noted the company has received $12 million in tax credits thus far in fiscal 2014, and has filed two applications for $21 million more.

This bears repeating: The ACES credits cover Miller's financing cost. The company's fiscal second-quarter 10-Q, shows that Miller's cash paid for interest ($5.712 million) and dividends paid ($3.258 million) in the first six months of the fiscal year added up to $8.97 million and, at that point, their Alaska tax credits received totaled $9.668 million. This critical fact was absent from the "short Miller" piece.

Smaller, emerging growth companies often have some warts, and Miller does as well. But please remember this: Elevated short interest is a good thing. Excessive negativity becomes dry powder when the shorts have to cover, and in this buoyant overall market, those days are even more apparent.

So, if you want stability, no reliance on outside financing and world-class corporate governance, buy ExxonMobil (XOM). If you want upside, buy Miller. I would also note that both Miller's Series C preferreds (which have a convertible feature) and Series D preferreds (which do not) have fallen to significant discounts to face value this week, and both yield over 11.75%.

Columnist Conversations

I set you up for the trading Week Ahead from the floor of the NYSE with Peter Costa of Empire Executions... Ha...
LNKD is trading $226.08, up 3.1% with IV30™ up 0.4%. This is a stock price and volatility note on a so...
From Moody's: "Dynegy announced that it expects to finance the transaction with $5 billion of unsecured notes ...
Kohl's is beginning to lose its upside momentum this week. The stock has been in hyper drive since the ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.