At times I think this market is certifiably insane, and it just keeps getting weirder out there. Other times I think it makes perfect sense. Timing is important, and can produce returns that are ridiculous. It also requires a completely different way of seeing, as securities that should be safe havens become pop-and-drop trading vehicles.
I've written about Miller Energy (MILL) several times before on Real Money, and with Miller's preferred shares languishing at 35-40 cents on the dollar earlier this week, I wanted to know when the company would declare the next dividend on its 10.75% Series C preferreds and 10.5% Series D preferreds. I know the next payment is due March 1, but with a strong chance of insolvency clearly being priced into Miller's preferreds, I reckoned that the mere declaration of a dividend would inject some confidence into the company's preferred shares.
I'd like to say that divining when Miller would declare, if the board of directors so chose, its next dividend required many hours of reading its public documents, visiting the company's facilities in the Cook Inlet of Alaska and studying its assets. I have done all those things, but guessing MILL's next dividend announcement actually only required one tool: Google. I simply searched the Web for Miller's preferred dividend declarations, and the hits showed me Miller has always announced the preferred dividends on the last day of the respective fiscal quarter (Miller's fiscal year ends April 30). So Friday was the day for that, and with the Series C preferred trading at a whopping $9.90 Thursday afternoon (under 40 cents on the dollar), I figured I would buy some in hopes of a press-release-inspired rally.
Well, Miller's board -- as they have done every quarter prior -- declared the preferred dividends Friday at 8 a.m. ET, and the market reacted. By the end of the day's trading, Miller's Series D preferreds had gained 20.6% and the Series C had risen 20.1%. It didn't hurt that crude had its best performance in two years, but even in the morning, when crude was still fighting to regain $45 a barrel, both Miller's preferred series were steadily rising, trade by trade.
So, let's just take a step back and think about this activity. Miller's preferreds rocketed because its board declared -- not paid, mind you, but declared -- a payment on a fixed income class. This after Miller CEO Carl Giesler stated on the company's last conference call in December that paying preferred dividends was "sacrosanct" to Miller's board.
Well, some in the market obviously didn't believe him, and boy were they wrong. It's just amazing how low the bar has been set for these E&P companies, and let me tell you, watching a short-covering bounce-back rally unfold is a thing of beauty. If one is long!
No one is declaring victory after one preferred dividend payment, and obviously the market's focus should be on Miller's ability to make those payments in the future. I am meeting privately with Giesler at next week's IPAA OGIS conference in Florida, and he and I will go through the factors impacting Miller's creditworthiness in a sub-$50/barrel oil world in excruciating detail, I am quite certain.
Even after Friday's massive move, the Series C and Series D are yielding 21.1% and 23.8%, respectively. The company's hedge book and tax credits receivable from the state of Alaska bolster their ability to make payments going forward, but obviously their Cook Inlet assets are higher-cost in a world where "uneconomic" is the buzzword in the energy industry.
But, on a day like today, that doesn't matter as much. Twenty-percent one-day moves tend to ease the desire to run credit numbers on a Friday night, and with that gain in hand, it removes the pressure to sell right away, or sell before the Feb. 13 record date of the dividends, which will add -- other things being equal -- a capital return of 5% to 6% to the capital appreciation already recorded. A nice way to start the weekend!
Please note that due to factors including low market capitalization and/or insufficient public float, we consider MILL to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
