Miller Energy (MILL) had more change today, as the company announced CFO John Brawley would be leaving the company on Nov. 14. While a C-suite departure is rarely good news, published reports indicated Mr. Brawley would be leaving to assume the CFO role at Sandridge's (SD) soon-to-be spun out MLP, MidCon Midstream LP. MidCon Midstream will operate salt-water disposal (SWD) and gathering assets. I have repeatedly praised the virtues of the SWD business in my articles about GreenHunter Resources (GRH), so I can't quibble with Mr. Brawley's choice of new employer.
The bigger issue to me is what's going on with Miller. From an equity perspective, it's all about production, and Miller provided an update today on its RU-9 well. The asset has shown flashes of potential, but completion problems still remain.
Miller is still working on the well, and management referenced possible damage to the well-bore during initial completion operations. In its re-completion efforts, Miller has perforated an additional zone (Tyonek) in addition to its original Hemlock target zone, which should improve ultimate recovery. If the market was waiting for "RU-9 is currently up and gushing oil," and that is clearly not yet the case.
Miller's release also touched on the issue that has been raised so much in the past two weeks: liquidity. My firm owns Miller's Series C and D preferreds in volumes that dwarf our holdings in MILL common shares. I really care about whether Miller can pay its bills, if $80 per barrel of oil is the new normal.
The answer is yes. The company's release noted $34 million in cash and current liquidity under its credit facility. Miller's interest expense plus dividends last quarter amounted to about $6 million. With new Series D preferreds issued, and a slightly higher balance on the revolver, that "interest/dividend" figure was likely closer to $7 million for the October quarter. Miller reported $14 million of adjusted EBITDA last quarter. On the surface, I'm happy with 2x coverage.
Those calculations ignore the fact that Miller has two aces up its sleeve: Alaska's ACES tax credit system and a hedging program.
The Alaska ACES are cash tax payments from the state to cover drilling costs and first-year losses from drilling programs. Miller received $21.7 million in tax credits in its July quarter, and I had in my notes from my recent site visit to Miller's Alaska facilities: "two checks, $31mm + $3mm." Today, Miller announced that it has received $56 million thus far this fiscal year. The numbers do add up, and it baffles me that so many observers fail to include the ACES payments in their calculations on Miller. Miller currently has applications for an additional $40 million credits pending or soon-to-be-filed with the state.
Miller's hedging program that is so robust that it could possibly cover 100% of Miller's production. The stock market seems only to care about Miller's production level, especially from new wells such as RU-9, but as a creditor, I care more about its cash flow. As disclosed in their last Form 10-Q, Miller's hedging program locks in about 197,000 barrels per quarter at a price above $99 for the next few quarters, and then gently declines (on the same volume) to an average price of $95.36 for fiscal (April) 2016.
Miller's Alaskan production in the July quarter was 202,000 barrels. If production doesn't increase at all from that level, Miller's run-rate volume would be nearly identical to its 197,000-per-quarter derivative volume. Miller would be perfectly hedged.
The stock market wants to see raging gushers from new wells, but from my perspective, keeping volume equal to the hedge position is a positive. Ultimately, if oil prices as measured by Brent stay near $85 (Miller's price basis is Alaska North Slope, which is based on Brent rather than WTI), Miller would receive cash payments from its derivative instruments that would further bolster liquidity.
Miller's common shares are going to be subject to market vagaries, and they may remain radioactive in the short-term. Miller's preferreds, on the other hand, are grossly undervalued at about $0.88 on the dollar. As I had mentioned in yesterday's column, I have been aggressively buying more.