Double-digit income yields catch the attention of investors in any environment, but that’s especially true these days — savings accounts yield a fraction of a percent, typing up your money in bonds or CDs for a few years likely means you’ll actually lose money after you account for even low inflation, and the average big “blue chip” stock pays out only about 2-3% in dividends (if it pays a dividend at all).
So for the near-retiree who needs income from a stock portfolio, or from the trepidatious investor who wants something in writing about how much money they can expect to make over the coming year, the idea of a dividend check coming every quarter and giving you a 10% income yield is pretty freakin’ exciting.
Which is, of course, why they use such a tease to get our attention when advertising newsletters, hoping that we’ll pay to subscribe in order to get the lowdown on this double-digit yield. High-Yield Investing does this frequently, hinting and teasing about their “high-yield stock of the month” and cajoling us to subscribe — but we are, of course, firm and steadfast in our resolve: Subscribing might be fine for folks who actually want these newsletters, but for those of us who just want the answer to the tease we are on the case!
Cue inspiring theme music, please!
OK, fine, so it’s not that big a deal — but this is apparently a preferred stock in some kind of oil company, and it pays out a better-than-10% annual dividend. That’s worth looking for. The tease comes from Nathan Slaughter, who has apparently taken over High-Yield Investing from longtime dividend diva Carla Pasternak (haven’t heard anything about her in ages, presumably she retired or moved on to greener pastures — the deck chairs move around a lot at most newsletter publishers), and here’s how he entices us:
“The 10.2% “Lifetime Oil Dividend” Paying Millions of Dollars Every Year
“Now we pull back the curtain to tell you the details of this discovery….
“It’s a high-yield opportunity that just one out of a hundred investors knows about. But if you’re looking for an enormous yield that could pay you massive dividends for life, then you need to learn more about our “High-Yield Stock of the Month” for November 2013.”
How about some specifics about the stock or the company? Here are some more clues:
“What’s surprising is that hardly any investors know about this stock. It went public in late 2012 to almost no fanfare. That’s partly because there are only 685,000 shares — that’s barely a blip on Wall Street’s radar….
“This security is backed by one of the most exciting oil companies on the planet. This company owns oil wells in Alaska’s lucrative Cook Inlet. This inlet is dotted with drilling platforms and blessed with vast amounts of oil and gas buried in large, developed shallow-water fields.
“The potential here is staggering. In fact, over just the past year the company has been able to quadruple its oil production — making it one of the fastest-growing oil producers in the nation. The company also holds 54 million barrels of total reserves within its properties. And we think our “High-Yield Stock of the Month” is the best way to get an interest in that production….”
And how about that dividend?
“… our “High-Yield Stock of the Month” is locked into a $2.69 per share dividend, paid out in regular quarterly installments….
“These preferred shares could provide you income for life. With no maturity date, they are set to keep trading and paying massive dividends until the company decides to buy them back (also known as “calling” the shares) from investors. Even then, the earliest possible call date isn’t until 2017….”
So … who is this? Nathan Slaughter is teasing the Series C Preferred shares of Miller Energy (MILL is the common stock, MILL-PC is the most common ticker for the preferred, though there is no standard ticker for preferred shares so your broker may use something different).
Miller Energy is a small and recently fast-growing oil company with producing assets in the Cook Inlet in Alaska, where they’ve been able to dramatically increase the production rates and value of rigs and fields that they essentially bought for peanuts out of the bankruptcy of another company, and they’re also the largest owner/operator of wells in Tennessee, where they’re just starting horizontal drilling and stimulation programs and may soon be going after new targets like the Mississippi Lime oil (a target that’s already being much more aggressively produced on the West side of the Mississippi river in Kansas and Oklahoma).
The company has been ramping up production pretty substantially at their wells in Alaska, but that hasn’t yet turned the tide to turn them cash-flow positive so they’ve been raising capital to keep operations going by, in part, selling preferred shares — these Series C preferreds were issued last Fall, you can see the prospectus here if you like, and just this week they also issued another series of preferred stock (Series D Preferred, naturally), and the Series D prospectus is here.
Preferred shares are sort of like “bonds lite” — they have a set payout schedule and amount (in this case, the Series C is fixed rate, the Series D converts to adjustable rate in five years) and a one-sided redemption feature — they can be redeemed by the company at par ($25 a share for both), but they are not guaranteed to be worth par at maturity like a bond is, and shareholders don’t ever have an option to redeem the shares for any set amount (though they can sell them to someone else at whatever rate the market is offering, of course). There is, in fact, no maturity date — after five years (so in 2017 for the Series C, in 2018 for the Series D) the company can buy the preferred back at $25, but they don’t have to. It looks like the Series C preferreds do have a convertible feature, so there’s potential upside if the stock does very well, but the Series D has a possible inflation kicker instead of a conversion right (more on that in a minute).
If the company goes bankrupt, the preferred stock holders are in front of the line ahead of common stock holders in claims to get some recompense from the company’s assets, but behind all the debt holders. If there’s a “change in control” of the company, which usually means a takeover or merger, the company can buy out preferred shareholders at the $25 par value without having to wait until the five year initial term ends.
I have not scoured the books at Miller Energy, but it looks like their debt levels are manageable as long as oil prices don’t collapse or as long as they don’t have some critical event (like a big spill in the Cook Inlet, for example) that cuts off their rising revenue — they don’t appear to be self-sustaining yet, but if they’re right about proving up their production capacity and being able to tap into their expanding reserves more quickly in the near future they should be able to get there. The company has high insider ownership and they do carry some high-interest-rate debt from a funding agreement with Apollo, but the rate on new additions to that credit line was dropped to 9% (from the crazy 18%) over the Summer, so Apollo apparently believes that they’re getting to be a better risk.
So … if you decide you love Miller Energy, do you buy the common stock or the preferred? The preferreds both currently yield roughly 10%, but they also are very likely capped, with capital gains beyond 10-20% over the next five years (total, not annualized) looking very unlikely for Series D, at least, since the company has the right to buy back the preferred shares at near the current trading price in five years (Series C has more capital gains potential, since I think that series is convertible at $10/share of common).
If the company does poorly, then, you have a better claim on their assets than the common shareholders … but if the company does spectacularly, you’ll either be pretty flat in the case of Series D, or up less than the common shareholders in the case of Series C.
The common stock is based on a foundation of their reserves in Alaska, though there may also be some upside in Tennessee — their latest investor presentation indicates that the SEC PV-10 of their proved, probable and possible reserves is $1.4 billion, while the small portion of that which is already proven (the P1 reserves, both producing and non-producing) is worth $386 million with that same SEC PV-10 calculation. The market cap, excluding roughly $50 billion in preferred shares and I think about $50 million in debt, is right around $360 million — so you can argue that you’re paying a fair price for the proven reserves, some of which are already developed and producing, and getting all those P2 (probable) and P3 (possible) reserves “for free.”
If you’re wondering what “PV-10” is, that’s the calculation of the present value of the reserves based on a 10% discount rate and whatever the petroleum engineers put in as likely production and decline rates of those reserves over time and their forecast price of oil. So it’s not the actual revenue that the company should earn from those present and future wells, it’s the estimate for what that future revenue should be worth to someone today if you model it using a 10% annual cash return as your base rate (for example, at a 10% discount rate like this $1.60 in earnings in five years is worth the same amount as $1 today, roughly). I don’t know what assumptions they used, and I’m certainly no expert at reading a reserves report.
So, it’s not a rock-solid blue chip oil company — but it is producing, it’s in the midst of a transition that could work out well if they continue to get production ramped up in the Cook Inlet to get cash flow to the level of sustainability, and we seem currently to be in a pretty key period of time for them. If the name sounds familiar to you, it could be because Chris Mayer touted them a couple years ago (we wrote that up here), I don’t know if he still likes them.
Most of what I’m looking at I pulled out of their SEC filings and their Investor Presentation, so if you want a quick overview of the bull case you can certainly check out the investor presentation here.
The Series C preferred pays $2.6875 per year in preferred dividends from now until the company redeems the shares, which can’t be done until November 1, 2017. If they fail to pay that dividend in any given quarter, they’re obligated to make it up. And this preferred looks like it is in fact also convertible into common stock at a $10 per share price, from my reading of the prospectus, so if they shares continue to climb and get markedly above $10 it’s possible that the preferreds will eventually trade at a premium to the redemption price of $25. It’s trading at about $26.75 now, just about exactly a 10% yield.
Series D preferreds, the newer ones just issued, pay $2.625 per year in preferred dividends until December 1, 2018, at which point (unless they’re redeemed for $25, at the company’s option), they switch to an adjustable dividend — that payout will be roughly 9% of $25 plus whatever the three-month LIBOR rate is at that point. So instead of the right to convert the preferreds to common stock if the common stock is up considerably, you get the right to (if they don’t redeem the preferreds) a potentially rising rate starting in 2018 if LIBOR is higher. These are trading at about $24.25 now, so you get a slightly higher 10.8% yield and an additional year of dividends before possible redemption in exchange for trading your conversion rights for future possible inflation protection beyond 2018 (though if inflation is that high by then, Miller may well be able to buy back the Series D Preferreds before larger payouts kick in).
Am I sure of all that? Not really — these are complicated prospectuses and I just looked at them quickly, so you are definitely not allowed to invest in this based on my say-so (not that you would ever invest in anything based just on my opinion, I hope), if those basic parameters sound appealing than read through the info and make your call (and, as always, let us know what you think with a comment below). Personally, from my first read-through of this I’d buy the Series C Preferreds of Miller Energy that Nathan Slaughter’s touting before buying either the common stock or the Series D Preferreds, but I don’t know enough about the actual operations and the underlying company to buy any of them at the moment.