The latest pitch from Dr. Kent Moors is for a new publication, a micro-cap energy stock trading newsletter and alert service called Micro Energy Trader. And though they say they’re restricting their subscriber list to 400 people (list price: $5,000 a pop — it’s “half off” right now), that’s more than enough to make some big waves with some of the teensy tiny picks they’re teasing …
… so I’ll start you off not only with my warning, that the stocks I’m going to try to reveal for you today could easily get all jiggly just because I write about them for you, and add on the fact that this big promotional campaign for the new newsletter, which will probably bring the new subscribers who might want to jump into the shares right away, seems almost guaranteed to distort the market if these are really microcap stocks (ie, stocks with market caps down below a couple hundred million dollars).
In fact, they were worried enough about that that they put it right in the lead of their letter, too — here’s how they put it:
“The firms you’re going to hear about in this presentation are some of the smallest publically traded companies in the stock market.
“So there are two important things you should know right up front:
- Stocks that trade for less than $1 a share come with some special risks; and
- Not all companies of this size pan out. To be sure, many penny stocks are penny stocks for a reason…
That said, we believe your odds of success in this powerful universe have just been greatly increased…”
So there’s your “beware, here be monsters!” tease — you’re forewarned, but you almost can’t help but read on to see what those “special risks” are … after all, you’re a clever sort who wouldn’t get sucked in, right? Yep, me too.
The basic idea is that Dr. Moors, who is a political science professor at Duquesne and a well-traveled oil industry consultant, has a special insight into some companies (they call it a “A Top Secret Dossier of Micro Energy Stocks”) that are so very tiny that he can’t recommend them to subscribers of his other, lower-priced newsletters — they would have too big an impact on the price, and it would be too hard for a large group to get in and out of small issues like the ones he’s apparently teasing … which, going by the mentions in the ad, included some absolutely absurdly tiny companies down in the $10-20 million range.
Such stocks are fun sometimes, to be sure, though lots of them probably shouldn’t be public and you often have to be ready for them to move 50% in a day even without news. These are the kinds of stocks that give unsuspecting new investors a lesson in the false comfort of tight stop losses — if no one’s buying the stock, you can’t easily sell it for your price as it’s falling. And trading in and out and paying close attention is always critical with microcaps if you like to keep a grip on your money — even one of the “win” stories they tease in this particular ad was a pick that bounced last Fall and Moors apparently harvested a nice quick gain … but it was bankrupt soon after (that was Ener1, which spiked from 14 cents to 39 cents on a CEO change last September, we’re told … bankruptcy has since driven the shares under a penny).
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But anyway, enough about the warnings and dire consequences of mucking around with itsy bitsy stocks — which ones are being teased here? We know you’re among the most discerning and discriminating readers in investordom — you’re here, after all — so we can trust you to make your own choices and not do something crazy to drive the stocks up or down.
Assuming we can identify them for you, that is. So … on to the clues!
“Unconventional” Homerun Potential… for 75 Cents a Share
“The first firm topping his list is an exploration and production company. It specializes in unconventional shale oil.
“And it’s poised for a major swing to the upside.
“That’s because it’s what is known as a ‘resource rich’ operator. It has significant reserves spread out over several different basins – the Bakken and Spanish Three Forks in North Dakota, the DJ formation in Wyoming (the highly promising and much discussed Niobrara basin), and the Haynesville and Cotton Valley in Texas….
“With NYMEX West Texas Intermediate benchmark crude north of $80 a barrel, available shale oil is incredibly desirable. And that puts this small company right in the center of the action – and ready for a sudden pop.
“Now, here’s the amazing part of the story…
“Today shares of this company can be bought for just 75 cents each. That’s 1,000 shares for just $750.
“So how high could it go?
“Back in 2008, when oil prices really skyrocketed, this stock was selling for a high of $84 a share.
“That means that if it runs back up to just a quarter of that, to $21, an initial $750 stake would be worth $21,000.
“That’s the sort of risk-reward ratio that is possible with these micro energy shares.”
So … who is this? Toss all that into the mighty, mighty Thinkolator and we learn that this is … GMX Resources (GMXR)
A quick look at the financials tells you why this once-$80 stock is trading at 75 cents (OK, it’s not 75 cents anymore either — that was a few weeks ago, it’s now down at 57 cents): They have $400 million in debt, $15 million in cash, and they burn through that cash pretty quickly with investments and oilfield expenses. Oh, and they just approved a reverse split, which is not always a bad thing but it does bring the stench of failure to investors’ noses (it helps to avoid delisting, which I assume is the rationale here — Nasdaq would rather you have ten million $5 shares than 100 million 50 cent shares). The un-split will be something between 5:1 and 13:1, it’s apparently not decided yet (meaning it will take between 5 and 13 current shares to equal one new share, and the stock will reprice immediately to reflect that). With the stock collapsing, I reckon I’d probably go for the 13:1 consolidation, but that’s just me and they haven’t asked my opinion.
The optimistic bit is summed up pretty well by the CEO on their website here — basically, they’re producing in their Bakken holdings now and are hoping to ramp that up to generate cash flow to help retire some debt and do more drilling. They’ve been doing some exchanges with holders of their first tranche of convertible debt that comes due in 2013 and, among other things, issued equity to those debtholders. They seem to have “beat” on revenues in the last quarter (amazingly, there are still five analysts covering this company), which helped to drive the shares up to 75-80 cents, but they’ve given up about half of that gain in the three weeks since. Those same analysts think they’ll book another 15% or so in revenue gains in 2013 and only lose 47 cents per share in doing so (if they lose 47 cents per share, they better hope it’s all depletion and asset impairments and not actual cash losses — that’s more than twice as much cash as they have on hand now).
I have no idea whehter or not GMX Resources will bounce back as Moors seems to think they can — they have apparently had a host of operational problems in North Dakota (equipment availability, electricity problems, high costs) that are waning, they say, and they claim a “proved NAV” of $340 million now. They also throw out a few other valuation arguments, including that their 18,946 net acres in the Bakken should be worth somewhere between $8,000-$20,000/acre going by Statoil and QEP purchases over the last year or so. That would get them to something like $300 million, too. Which is impressive for a $45 million market cap company, but we also have to remember that debtholders really “own” most of GMXR — the enterprise value (market cap plus net debt) is about $450 million according to Yahoo Finance, so that’s what the broad market thinks the whole company is worth right now.
They do have other assets in the Niobrara, Haynesville and Cotton Valley areas, but the focus is on the Bakken and oil right now, that’s where all their capital investment is going because natural gas prices are so low it doesn’t make sense to invest crucial funds in gas-heavy projects. You can see their latest investor presentation here, this is what they’ll be presenting tomorrow at an energy conference (I’d love to say it’s my top-notch connections that get me this early info, for which I’ll charge millions from my retirement hideaway in Grand Cayman, but I’m afraid I just pulled it off their website).
So there you go … a micro cap stock, with assets and lots of debt, trying to get cash flowing. They’re this cheap because, as far as I can tell, they’re teetering and are really owned by the bondholders, but sometimes teetering stocks do recover on the right side of the guardrail. You can sniff around and see if you like what you see, feel free to shout out with a comment below if you’ve got an opinion on GMXR. I did write about this stock a year and a half ago when it was being teased by Frank Curzio for his Penny Stock Specialist newsletter, but he presumably sold out soon after since the stock fell precipitously and he’s a big believer in stop losses, and I haven’t looked at them in the interim. They would, presumably, be pretty well levered to gas as well, given their gas-heavy production profile to this point (the switch to focus on oil is pretty recent) … but with five years of what looks like pretty weak output, when they haven’t been able to generate cash other than through stock and bond offerings, there’s certainly plenty of room for concern, even if it does seem pretty likely that they’re going to be able to get their debt restructured. Even if a stock price is minuscule, after all, you can still lose 100%.
And we’ll sniff out one more for you — here are the clues Moors provides:
“This Shallow Water Drilling Company Could Run from $5 to $38 a Share
“This play involves the fourth-largest shallow water drilling company in the world.
“It has the largest jackup rig fleet in the U.S. Gulf of Mexico with annual revenues of $650 million.
“Since Kent began recommending this micro energy stock, the oil field service (OFS) segment in general, and offshore provisions in particular, have begun moving up smartly. And this company has moved right along with it.
“The stock is up 17% since July, and it’s climbing fast. Its performance is better than offshore shares as a group.
“But it’s not too late to buy it.
“Not even close…
“You can get in for just $5 a share right now. And Kent believes it could run all the way up to $38.
“Odds are, it will.”
This one, sez the Mighty, Mighty Thinkolator, is Hercules Offshore (HERO). And it’s probably still the fourth largest jackup rig fleet operator in the world, and the largest in the US, but there was just a high-profile transaction in this area — Transocean (RIG), the big offshore driller, just sold off 38 jackup rigs, many of them in the Gulf of Mexico and, at a quick glance, comparable to the standard commodity jackups that HERO owns, to a venture-backed new drilling company. That company effectively paid about a billion dollars for the 38 rigs, which are in place and largely under contract around the world (five are “cold stacked” in storage, waiting for demand), though contract lengths are typically fairly short for these kinds of shallow-water rigs (they stand on the ocean floor and, depending on capacity and size, can drill in water depths of 150-400 feet or so) — many contracts are for less than a year and for $50-100,000/day, as compared to the deepwater rigs, which cost hundreds of millions more to build and can get dayrates of $600,000 going out five years in some cases. So these Jackups are the ugly stepsisters of the rig business, they’re more commoditized and a lot of them are still stacked, particularly with the gas activity in the Gulf being a bit light — HERO has 14 of their rigs cold stacked right now, out of a total of 39 owned.
I haven’t checked the age or capabilities of these rigs, but there don’t seem to be many on long-term contracts and the HERO fleet seems pretty comparable to me to to the RIG fleet that was just sold, so if the rigs are comparable, then HERO’s “fleet value” is potentially right around a billion dollars, too — 39 rigs versus the 38 that were sold for a billion bucks by Transocean to the private equity-backed startup Shelf Drilling. Shelf has only five rigs cold stacked right now, versus 14 for HERO, and HERO’s fleet is almost entirely in the Gulf of Mexico whereas Shelf’s is spread across Africa and Asia. HERO also runs a fleet of inland barges, most of which are also cold stacked, and about 60 liftboats which are used to service the jackups (liftboats are boats that can set down feet to perform maintenance, etc. on the rigs).
HERO has pretty high insider ownership, with not a huge amount of buying or selling lately — though lately folks on the inside seem to have bought in the $3-3.50 neighborhood and sold in the $4.50+ neighborhood. Analysts are forecasting a return to profitability next year and earnings of 27 cents a share, which would be a huge turnaround, but there is a wide difference of opinion — it really depends on jackup demand in the Gulf, which depends on exploration activity and, presumably, on improvement (or steadiness, at least) in natural gas prices. If Hercules Offshore gets back to $38 anytime soon I’ll be incredibly shocked, but that doesn’t mean it can’t improve a bit from here — the shares have traded between $4-6 almost exclusively over the last four years, and given the big inventory of rigs in storage and the lack of enthusiasm for offshore gas exploration in the shallow Gulf that seems fair … if we see a big opening up of the continental shelf to exploration that would certainly increase demand, but that’s probably years from happening even if politics moves in that direction, so I think HERO is pretty likely to continue to rise and fall on the prospects for shallow water work in the Gulf of Mexico.
Of course, that’s just my quick opinion based on a few minutes with their filings — there could easily be more to the story, so if you’ve got an opinion on HERO or GMXR, by all means, share it with a comment below. Thanks!