NGP Capital Resources: What's Up With These Reporting Delays?

Mar.16.10 | About: OHA Investment (OHAI)

NGP Capital Resources (NGPC), a Business Development Company (or BDC) that specializes in energy lending, has just announced for the second time a delay in the release of its earnings. Here's the text of the press release:

NGP Capital Resources Company today announced that it is postponing its fourth quarter 2009 and full year 2009 earnings release and will reschedule it as soon as possible. The Company intends to file later today a request for an extension to the Company's normal reporting deadline of March 16, 2010. It is anticipated that the Company's 2009 Annual Report on Form 10-K (the "2009 Form 10-K") will be filed on or before the fifteenth calendar day following the prescribed due date of the Company's 2009 Form 10-K. The Company will release earnings and reschedule its earnings teleconference when it is prepared to file its 2009 Form 10-K.

We don't have any inside information on what the issues are that are causing these delays. However, we did read a post on the message board at Yahoo Finance where a poster claimed to have talked to "a contact" at NGPC (this was back at the time of the first delay in reporting on March 12th):

I spoke with a contact at the company. Obviously they are very limited in what they can say. Bottom line, not a big issue, has to do with how to account for something between parent and subsidiary. Their auditors have been slow to decide the issue. At this point, Company is frustrated and embarrased and will do whatever auditors decide to get issue resolved. Bottom line, seems to be an arcane accounting issue and not something we as investors need to be concerned with. I trust the management of this company and plan to continue to hold position.

Last time NGPC reported earnings the balance sheet had twice as much cash as debt so we're not worried about bank defaults arising out of whatever is going on. NGPC recently renegotiated its under-utilized Revolver with several banks and extended the facility to 2012. Still, the stock price has been dropping sharply on the news, down $1.0 in a few days or 11%. Looking at the chart in real-time as I write, the stock drop may accelerate further.

What to do in this situation? Buy, Sell or Hold ? We have to admit to being influenced by the "lessons" of the Great Recession. In the past we took a long term view and tended to ignore these types of developments until we had hard evidence of a deterioration in the Company's financial outlook. We would see sharp drops in the stock price like today's as a buying opportunity in an industry where there were few bargains around during the heady days of 2005-2007. In retrospect, though, our experience was that in most (but not all) cases the investors who bailed early were the ones who fared best. In the deteriorating environment of 2008 and early 2009 most bad news was followed by worse news and by the time all the evidence was in to make an informed judgement (an Earnings Report, Conference Call or SEC filing) the stock was sharply down. The other sad truth of the matter is that management, always effusive when there is good news to be reported, tended to become close lipped and minimalistic in their disclosures in the face of weakening market conditions.

On the other hand, the economic environment today is much more benign. Most other BDCs are reporting relatively positive results, and asset values are not dropping daily. Although NGPC has had some struggles in recent quarters, cutting the dividend from 41 cents a quarter at the end of 2008 to 12 cents in the first quarter of 2009, its balance sheet is strong and has has substantial "dry powder." The Company recently announced an increase in the pay-out to 17 cents for the IVQ of 2009, and the market (as reflected in analyst estimates) has been projecting further divvy increases. Then there's the opportunity to buy at 10% off...

Nonetheless, we'd rather be "safe than sorry." We decided, in the light of our experience in the Great Recession, that we would pull the trigger if we had any significant doubt about a company's financial condition. We have sold our entire position today in NGPC, and will need a full explanation of what's been going on before buying back in. Our caution may be some other investor's gain. What is important from our viewpoint is to maintain a "disciplined strategy" as they say on Wall Street.

Disclosure: No position in NGPC