Miller Energy: Digging Itself Into Another Deep Hole?

| About: Miller Energy (MILL)

Miller Energy Resources (Nasdaq: MILL) sure has proven one thing to the world, and it's not the tremendous value of the discarded oil reserves that the company picked up for next to nothing after more sophisticated players said, "No, thank you," either. Rather, as a bleeding energy firm buried underneath a mountain of expensive debt - with that weighty burden set to grow even heavier in a matter of weeks - Miller has by now established that, if nothing else, it certainly knows how to dig itself into a dangerous hole.

Take the daunting challenge that Miller will face next month, just for starters. Desperate for cash earlier this year and now on the hook for the promises that it made in order to secure those essential funds, Miller must somehow find a way to come up with $75 million by the end of January in order to avoid loan-shark interest rates (approaching the 20% mark) on every bit of the bank debt that the firm currently owes. For a company with barely $20 million to its name right now - and commitments to cover not only the double-digit interest payments that it already owes to both its lenders and its preferred stockholders but also the $60 million that it just pledged for a major acquisition to boot - Miller can hardly afford for its hairy predicament to grow even worse at this point.

To Chapman Capital Founder Robert Chapman, the former boss of Miller President/Acting CFO David Voyticky and an obvious skeptic of both the company and its senior management team, Miller barely even resembles a normal energy firm since it focuses so much of its attention on raising capital that it seems to market its stock as its primary product while selling a little bit of oil on the side.

"The gross production numbers are not big - they're tiny - and the company is still cash-flow negative (from operations combined with necessary capitalized investments), so it has to keep selling this story about its monstrous reserves," Chapman recently noted during a revealing interview with TheStreetSweeper about the five-month period when he employed Voyticky as a partner at his firm and found the future Miller executive too incompetent (or unwilling) to fulfill the transactional activist, non-investor relations duties required of that post.

"In the meantime, just look at the company!” Chapman declared. “It’s a preferred stock-issuance machine that seems to be more in the business of raising money than making money. And to me, it looks like a stock that's driven by a myth."

Like other dubious investors, Chapman refuses to buy that story. Indeed, Miller strikes the fund manager as a dangerous company that has placed its trust in an executive that (based upon his own firsthand experience) lacks any substantial skills outside of his ability to raise capital by "smooth-talking investors and lenders into parting with their funds."

“With Voyticky involved,” Chapman bluntly proclaimed, “I can’t think of many better targets for a short.”

Don't mistake Bristol Capital Advisors as a noble savior just because that "activist" firm suddenly feels driven to overthrow the current leadership due to its alleged incompetence and obvious greed, either. After all, Bristol secured its sizable stake in Miller courtesy of lucrative consulting deals originally awarded - but recently cancelled - by the same boardroom directors that the "outraged" firm now aims to replace with a brand-new slate of its own.

If history serves as any guide, Miller could pay a rather steep price for that intervention should Bristol ultimately succeed.

A notorious firm led by Paul Kessler - a former consultant to the company -- that often caters to obscure firms in the penny-stock arena, Bristol has regularly provided welcome cash to desperate microcap players that later wind up in agonizing pain. They often face the threat of massive dilution or, if dogged by accusations of outright fraud, can go completely bankrupt instead. Their shares may sink to mere pennies (or even lower), history shows, with regulators sometimes stepping in to block them from trading altogether.

By now, Miller has already shown that the company can make a big enough mess without that sort of "help" all by itself. Back when its stock weathered a nasty hit on a revealing investigative report published by TheStreetSweeper two years ago, after all, Miller responded with such a reckless move - prematurely assuring the market that its independent auditors had verified the gigantic reserves listed on its balance sheet - that the company practically sent its battered shares into a full-blown death spiral. Despite that harrowing experience, however, Miller still acts like a company that never learned its lesson at all.

In short, Miller seems just as tempted as ever to pump more than ordinary crude oil.

Take the impressive figures that Miller released to investors ahead of its latest quarterly report, for example. After rushing to pre-announce that it had sold "over 200,000 barrels" of oil during its most recent quarter, Miller has since followed up with actual results showing that the company never even produced that much oil in the first place. While Miller scrambled to address that disparity with a rather vague explanation, suggesting that it may have included sales of oil from its previous inventory in that total, the company basically undermined even that handy excuse by posting revenue figures that failed to reflect any contribution from that excess supply.

With its stock already riding a powerful wave of momentum by the time that the company presented that update, impressing bullish analysts who somehow overlooked its curious math, Miller kept right on flying to hit a record high just shy of the $9 mark - almost triple the price that it had commanded at beginning of the year -- and only lost its steam when the proxy battle erupted to knock the wind out of its highflying shares. Even after an ugly haircut that chopped its stock by 15% last week to end around $7.50 a share, however, Miller still boasts a handsome $340 million market value that strikes many financial experts as far too generous for a bleeding oil company with relatively modest production but incredibly burdensome debt.

By assigning a reasonable valuation to its oil reserves and then subtracting its mountain of debt from that total, one hedge fund manager recently calculated, the true value of Miller lies somewhere between a measly $17 million on the conservative end of the spectrum and $107 million on the very highest end of that broad range. With almost 50 million fully diluted shares at last count, those figures suggest, Miller should trade as a lowly penny stock fetching as little as 35 cents and no more than $2.20 a share - or 70% less than its current price - at the absolute best.

“Nobody else wanted to buy those assets anywhere near the price Miller paid, much less where they are valued by the company today,” he reminded. “They figured there was nothing highly valuable there (after estimating the size of the reserves and the costs associated with extracting the oil).

"What Miller did was kind of ingenious, actually. When you buy reserves, it's something that's inherently ambiguous. You don't know how much oil you have under the ground, how much it will cost you to produce it or how much you will be able to charge for it, either.

"So you don't know quantity, cost or price. Those are three big levers that you can pull when you're estimating the value of reserves to arrive at a really big number. (But) nobody really knows how much those assets are actually worth."

While its reserves looked wildly overvalued back when TheStreetSweeper first investigated the company a couple of years ago, since it bought those abandoned assets for a paltry $4.5 million and then miraculously valued them at a whopping $350 million on its balance sheet, Miller has since boosted that enormous valuation to even more staggering levels and prompted its stock price to swell right along with it. Miller has staged such a dramatic come-back over the course of the past year, in fact, that the company had already recaptured the attention of TheStreetSweeper even before Bristol declared war on its current leadership team. After heightening its scrutiny of Miller over the past several months, TheStreetSweeper recently escalated its surveillance of the controversial firm by launching yet another full-blown investigation of the company.

Think of this alert as a mere preview, a free trailer warning investors of potential danger in advance, as TheStreetSweeper continues to gather revealing information about not only Miller itself but also those now fighting to control the embattled oil firm. To be sure, by extending the same riveting plot introduced in its first investigative report on the company - and casting an even brighter spotlight on prominent members of that notorious cast - TheStreetSweeper could easily produce a sequel that lives up to the original by delivering some powerful punches of its very own.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in MILL and stand to profit on any future declines in the stock price.

  • Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Melissa Davis, the editor of this website and the author of this story, please send an email to

Disclosure: I am short MILL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.