Yesterday was a big day in the history of Miller Energy Resources (MILL) and the shares showed it, with a 12.5% gain on the day. The news:
- Chairman and Founder Deloy Miller resigned from the Board after 40 years of service. Mr. Miller is being replaced on the Board by A. Haag Sherman.
- Scott Boruff, Mr. Miller's son-in-law, will step down as CEO, but will remain as Executive Chairman.
- Carl Giesler, most recently running oil and gas investments for Harbinger Capital will assume the reins as Miller's CEO.
- Miller also announced the signing of a non-binding letter of intent to acquire the Alaskan assets of Buccaneer Energy. Buccaneer currently produces 1,700 boepd of natural gas on the Kenai Peninsula.
- Miller's announcement also noted that management is considering spinning off its midstream assets into an MLP.
The MLP announcement is tantalizing, given that Miller has valued its currently-owned midstream/rig assets at $175 million. Of course, I don't blindly accept self-valuations from any company (valuation is my job, and I am running those numbers now), but with Miller's market cap as of Friday's close at $203 million, the midstream assets were clearly being given very little value by the market, and possibly not given any value at all.
Miller's pending acquisition of a controlling interest in the Savant property on Alaska's North Slope will bring processing capacity of 38,500 boepd and 50 miles of underutilized pipeline. Miller's recently-closed acquisition of Anchor Point Energy brings 9 miles of twin 4-inch pipeline.
So, there's some critical mass on Miller's midstream, but the company has also been building mass on the rig side. Miller now owns 4 rigs with the recent purchase of the Glacier #1 rig (which was once owned by Buccaneer).
I see no reason why the rigs and pipeline couldn't be combined into an MLP asset. Obviously, such transactions are Mr. Giesler's forte -- Harbinger created an MLP with assets gained in a venture with Exco, Inc. in 2013--and I surmise the reason why Miller's Board decided to hire him as CEO.
Miller also produces hydrocarbons, of course, and that has been the cause of much of the stock's volatility--and underperformance. Miller's public perception has been on a hamster wheel driven by the performance of the "next well."
At this point that well is the RU-9, which Miller described positively in subjective terms in yesterday's release and on last week's earnings call. But the market wants to see the IP, the initial production rate. Miller has predicted that well to IP at 750 barrels of oil per day (gross) and the variance (if there is any) of the actual production versus that guidance will drive the share price over the next few weeks
But, that's a very shallow analysis on a company that is drilling a deepwater well. Really, taking a look at year-on-year comparisons from Miller's latest earnings (for the fiscal quarter ended July) are most instructive.
Here are the relevant figures with the quarter ended July, 2014 listed and then the quarter ended July, 2013.
Production (net to Miller's interest):
- 3,313 boepd (Quarter ended July, 2014)
- 1,360 boepd (Quarter ended July, 2013)
- $25.4 million(Quarter ended July, 2014)
- $13 million (Quarter ended July, 2013)
- $14 million (Quarter ended July, 2014)
- $1.2 million (Quarter ended July, 2013)
PV-10 Reserve Value:
- $448 million (As of 30th June, 2014)
- $367 million (As of 30th April, 2013)
So, Miller's daily production has increased 144%, the company is generating more than 10x as much cash flow (as represented by EBITDA) and has 22% more reserve value. And yet, as of Friday's close, the share price had declined 38%. The company did not hit the daily production rate targets it had set in late-2013, but the stock's time in the penalty box has obscured the magnitude of value creation there.
Thus, especially with a potential MLP deal on the horizon, MILL has become a deep-value play, and I'm usually not one for momentum plays, anyway.
Miller's one of the 10 names in my Mad Money model portfolio, and as I start up a couple new Mad Money accounts this week I'll be layering MILL in with the other initial positions. The double-digit coupons on Miller's Series C (10.75%) and Series D (10.5% with a floating feature beginning in 2018) preferreds are a strong component of the returns for my income-based Classic accounts.