Lest anyone think I'm writing using insider information, Miller Energy (MILL) filed an 8-K well after the market closed last night, and several hours after my column on their preferred shares.
The 8-K divulged that Miller had received a Wells Notice from the SEC regarding activities from 2009 and also had received a letter from the NYSE indicating that MILL's listing could be in jeopardy due to its sustained run under $1 a share.
The Wells Notice is civil, not criminal, and is quite dated, as it regards events from 2009. I can't even count how many companies I follow that have "broken the buck" and received NYSE status letters, which call for a plan to address the share price and then allow for further time to implement that plan.
Neither is a big deal, but the last paragraph in the release was, and has certainly gotten the market's attention as MILL and its preferred Series C and D have all fallen 25% in today's trading.
Miller management noted that the company's board of directors had not made a decision regarding the next payment of preferred dividends on the Series C and D shares.
So, will Miller make its scheduled preferred dividend payment?
The relevant numbers:
Payment amount: $4.369 million
As of Jan. 30, Miller had 3.25 million shares of the Series C and 3.331 million shares of Series D outstanding. So, by my calculations, the quarterly interest payment on the two preferred series is about $2.18 million each and $4.369 million total.
Latest declaration date: May 5. I am told by MILL management that they have to notify the NYSE by Tuesday whether the June dividend will be declared.
Record date: May 15. This is fixed in the prospectuses.
Payment date: June 1. Also fixed in the prospectuses.
So, Miller needs to come up with $4.4 million by June 1.
And to squelch three conspiracy theories I've heard several times today:
-- I read Miller's charter (fun!) today and the company can only choose to pay preferred dividends "in kind" in the event of a change of control. There's no PIK option for quarterly dividends.
-- I don't know where people come up with the idea that companies can convince investors to trade their preferred stock for common stock, but if anyone has an example of this being done successfully, please e-mail me at email@example.com
-- There is language in Miller's March 8 8-K that states that Miller would need to raise $10 million in net proceeds from offerings of preferred shares to be able to make the next dividend payment. My reading of the prospectuses shows that authorizations for both preferred series could be increased with approval of Miller's board.
There simply is no choice for Miller management -- if they want to sustain the company in its current form -- other than to pay preferred dividends.
Yes, Miller's preferreds are cumulative, and, per the prospectuses, four payments can be skipped on the two preferred series before a penalty rate of coupon plus 2% applies. One might say, "Oh, we can just non-pay for a few quarters and then catch up." The market doesn't see it that way.
Yes, Magnum Hunter (MHR) had to non-declare for five months in 2013 (loyal readers of my newsletter know I covered that saga in full detail as it happened), but that was purely due to an issue with its auditors that led to late filing of MHR's 2012 10-K, prohibiting payment of preferred dividends.
Not paying because a company doesn't have the cash on hand is a totally different thing. If the market perceives a liquidity crunch, all bets are off and the common will go down with the preferred.
Want proof? Look no further than the stock chart of Escalera Resources. I made some money flipping Escalera's preferred (ESCRP) into its fourth-quarter dividend announcement. I was fortunate enough to be out of ESCRP long before management's foolish decision on March 9 to suspend payment of its preferred dividend.
Escalera as we know it is dead, and I can't predict what Miller's board will do, but I sent the ESCR/ESCRP stock charts to my senior-level contact at Miller today and included the following in the last paragraph of my e-mail:
If you omit your preferred dividend, the market will punish your common and send your preferred to a level that implies liquidation.