The performance of energy preferred shares has been predictably volatile of late. Yes, predictably volatile. These shares will get hammered down to levels that would indicate bankruptcy is imminent, like 20 to 40 cents on the dollar. But then they would snap back, as either:
- There is some company-specific news item that demonstrates the company's ability/willingness to pay preferred dividends. This shows the market that the sell-off in preferred shares was overestimating the company's chances of insolvency (i.e. underestimating liquidity.)
- The underlying commodity starts to improve, in this case oil. If we see oil start to rally by $1/barrel, it's not uncommon for the preferreds of smaller E&Ps to move 10-20% in one day. I have even found this pattern to hold for companies that produce much more natural gas than oil. It's the reverse of shoot-first/ask questions later.
Whatever the cause, the reaction in the stocks has been fiercely to the upside, a pattern that would indicate short squeezes are occurring.
In the last two months, among companies I have written about there have been stunning price moves. All the securities listed below have $25 par value, and all were trading above that par six months ago. GreenHunter Resources (GRH) Series C have rebounded from $10 to over $19, Escalera Resources (ESCR) Series A preferreds have bounced from $6.08 to $14.30. Magnum Hunter (MHR) Series E have rebounded from $8.80 to $20.50 today. Most tellingly, as I noted in a prior column Miller Energy's (MILL) Series D preferreds jumped from $7 to $15 (they have since pulled back somewhat) when the company's Board merely declared a dividend.
So, who's next? I believe the best candidate for a preferred share short squeeze is Goodrich Petroleum (GDP).
Goodrich's three preferred series are all trading at greater than 60% discount to par, and the compny's board is due to declare a preferred dividend within the next week.
If Goodrich's board declares a preferred dividend in the same fashion as it did at this time last year, then a Series C holder would be entitled to a $0.625 quarterly payment as of March 15. GDP-C closed on Monday at $7.60, so if Goodrich makes that payment, an investor who bought at the close today would receive 8.2% of his money back in three weeks.
And that's no special dividend, of course, it's a quarterly payment. Each payment has to be approved by the board, but I've stood my ground on a bunch of preferreds that pay monthly. So, the fear of the "upcoming dividend payment" just doesn't exist for me anymore. I do my math, and sit back and wait.
To get an 8.2% return of capital in three weeks on a security with no stated maturity date (these aren't sinking fund payments) is absolutely insane. One could read Graham and Dodd, Fabozzi and whomever and never find an academic situation like this real-world example.
I need to cut this column off here owing to space constraints, but tomorrow I'll go through the numbers behind my belief that Goodrich can make its preferred dividend payments.