Miller Energy: This Hot 'Alaska' Stock May Be About to Melt (Part 1)

| About: Miller Energy (MILL)

By Melissa Davis and Janice Shell

Before Miller Energy Resources (NYSE:MILL) purchased some abandoned assets in Alaska for $4.5 million – or barely half the price that its CEO paid for his sprawling Tennessee mansion – and then pegged the value of those assets at more than $350 million on its books, the company spent years fruitlessly trying to escape from the penny-stock arena through smaller deals that often wound up backfiring instead.

Those previous deals triggered serious legal disputes, with one of them crippling Miller for years and another – while touted as a “huge victory” for the company at the time – since quietly reversed this May on appeal. Miller could face potentially significant liabilities, far exceeding its modest cash resources, if the company fails to overcome that recent courtroom setback. Meanwhile, Miller has been slapped with a brand-new lawsuit – this one related to the Alaska deal itself – seeking piles of warrants for dirt-cheap stock from the company as well.

Despite that alarming track record, however, Miller has managed to convince investors that the company finally hit the jackpot – by snagging valuable assets that its previous owners (now bankrupt) initially could not sell – this time around. Miller’s stock, which fetched mere pennies on the lowly Pink Sheets just a few short years ago, now commands $7 a share after snagging a coveted spot on the premiere New York Stock Exchange. The company currently boasts a handsome market value of $280 million, almost 12 times its prior-year sales, even though it relied on a gigantic gain on its new Alaskan assets for the only dramatic profit that it has ever recorded since going public through a reverse merger almost 15 years ago.

But experts contacted by TheStreetSweeper, including skeptics in both the energy and financial sectors, have expressed clear doubt about those numbers. For example, an executive at Nabors Industries (NYSE:NBR) -- a $7.6 billion energy giant that decided against buying those assets for itself -- estimated that Miller actually wound up with just $25 million to $30 worth of assets, offset by $40 million worth of liabilities, through that transaction instead.

“That deal had been on the Street for over a year; everybody and their brother had looked at it,” said Jordan “Digger” Smith, who manages energy projects for Nabors – which actually operated Miller’s new properties – all across the country. “I’m a geologist, with 54 years of experience, and I can’t see how anybody can write that up on their books for $350 million … There are not $350 million worth of assets there.”

Miller did not respond to messages from TheStreetSweeper, including an email with a detailed list of questions, seeking input for this story.

So far, Miller has yet to supply audited financial statements showing that KPMG – a respected Big Four firm hired almost six full months ago – has verified the hefty valuation that the company placed on its new assets and the impressive profit that resulted from the enormous gain that it recorded on that acquisition deal. Miller is still relying on the blessing from its prior auditor Sherb & Co., notorious for approving the books of dubious Chinese reverse-merger companies, to lend credibility to those figures instead.

China Integrated Energy (OTCPK:CBEH), once among the largest of those clients, actually replaced Sherb with KPMG itself before Miller did the same. Although CBEH boosted investor confidence with the move and initially secured a clean audit opinion from KPMG, The New York Times recently noted, the company soon found itself hunting for a new auditor after the Big Four firm disavowed its favorable review and fled – in the “perhaps most embarrassing” resignation of the year – less than two months later. Long portrayed by critics as an outright fraud, CBEH has since moved from the Nasdaq to the scam-riddled Pink Sheets and, this week, resorted to using Sherb as its auditor once again.

Miller’s own audit committee actually reported some “accounting errors” in the company’s financial statements this March -- the month after hiring KPMG – when it warned of a likely restatement, adjusted for increases in both expenses and losses, going forward. Miller has gone on to miss the deadline for filing audited financials since that time, quietly violating a covenant in a new credit agreement and technically defaulting on the terms of that $100 million funding deal in the process.

If its lenders decide to play hardball, Miller could pay a very high price for any ongoing delay. Following a default, the credit agreement indicates, Miller faces an even steeper interest rate – set to jump from a minimum of 9.5% to credit-card levels of at least 16.5% instead – and could lose access to additional funds, with demands to repay the millions it has already borrowed, as well.

Power and Greed

At least one of the three lenders supplying those funds – the firm that, in fact, brokered the deal – has evidently delivered some painful blows to its clients in the past.

Bristol, a firm led by Paul Kessler that caters to obscure penny-stock companies, has regularly provided welcome cash to desperate microcap players that wind up in serious 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 at all.

But Miller has inked multiple deals with Bristol regardless. Indeed, Miller has not only relied on Bristol for financing and consulting services, records suggest, but the company has also used the firm to score one of its favorite toys as well.

Miller purchased an airplane partially owned by Bristol late last year, records indicate, using its stock to pay for that aircraft and then flying it to some rather curious locations. For starters, records show, Miller’s new airplane has flown to or from a small town in Delawarelocated near the home of the CEO’s girlfriend – eight different times in the past few months alone. It has also flown to or from the beach in Florida more than a dozen times during that brief period, records show, while visiting faraway Alaska – the key source of the company’s much-touted growth -- just once over the course of that same timeframe.

Miller CEO Scott Boruff has purchased one of the “most lavish homes” in Knoxville (a full hour from the office) along the way, the local newspaper revealed, paying $8.5 million for that “mega mansion’ – or 90% more than Miller paid to secure its prized assets in Alaska – and another $1 million to furnish the place. That 36,720-square-foot mansion dwarfs some of the largest homes purchased by Hollywood celebrities, records indicate, a sprawling estate that’s almost as big as the gigantic houses owned by Barbara Streisand, Cher and Jerry Seinfeld combined. Known as “Villa Collina,” the Knoxville News Sentinel reported, Boruff’s new home (originally listed at $21 million) boasts the following features: eight bedroom suites, 11 full bathrooms, a tri-level library, an elevator that services all three floors, indoor and outdoor swimming pools, an in-home fitness center, a seven-car garage and a 3,000-square-foot wine cellar.

Under a standard mortgage deal (with 20%, or $1.7 million, down and a 30-year term), records indicate, Boruff would face house payments totaling $544,000 a year – a sum that exceeds his entire $500,000 base salary – and almost $120,00 in annual taxes to boot. Late last year, however, Miller granted Boruff a generous bonus that will at least double – and potentially quadruple -- his cash compensation to between $1 million and $2 million, while offering him more stock on top of past stock options (priced at just 33 cents a share) that he can sell in a pinch down the road.

Miller justified that handsome payout as a well-earned reward for Boruff’s recent accomplishments at the company, particularly the expansion into Alaska and the remarkable performance of the company’s stock, but later admitted in its proxy statement that it “did not consult with any experts or other third parties” (beyond an unnamed attorney) before inking that deal. Likewise, corporate filings indicate, the company sought no expert guidance when establishing the hefty compensation plan afforded to its past president – who left with 1 million cheap stock options after barely seven months on the job – or the sweetheart deal that it promised to the insider who just replaced that executive, either.

Give and Take

Although former Miller President Ford Graham spent little time at that post, records indicate, he played a crucial role in reshaping the company.

In fact, as the founding general partner of Vulcan Capital in New York City – a position he apparently continued to hold while doubling as president of Miller (some 750 miles away) – Graham helped arrange the company’s celebrated expansion into Alaska before he officially joined its senior management team. Back in October of 2009, records show, Graham’s New York firm agreed to supply Miller with $5.5 million worth of funding so that it could acquire Alaskan assets recently abandoned by debt-burdened Pacific Energy Resources after that company filed for bankruptcy. The Lazard investment banking firm had by then futilely sought buyers for those assets, records show, which soon fetched a winning bid of just $875,000 – a minute fraction of the value that Miller has since assigned to those same properties – when auctioned off to Cook Inlet Energy (NYSE:CIE), a future subsidiary of Miller, the first time around.

“The abandoned assets had incurred significant losses and were unable to generate sufficient positive cash flow to sustain ongoing operations,” Pacific noted in court filings related to the case. So “as a result of the debtors’ marketing efforts, the debtors believe that the buyer’s offer has been fully tested by the market and thus constitutes fair and reasonable consideration for the sold assets.”

The following month, records show, Vulcan inked a much larger financing agreement that promised Miller $36.5 million in funds – with more than $5 million of that placed in a special account to close the acquisition – ahead of a second auction for the Alaskan assets. This time, records show, Graham found himself bidding for CIE against the investment arm of a multibillion-dollar energy corporation that capped its own offer just above the $2 million mark.

Ramshorn Investments, a subsidiary of Nabors Industries, repeatedly suggested that CIE lacked the cash necessary to close the deal along the way -- despite assurances to the contrary – and then ultimately walked away, refusing to match CIE’s final offer, in the end.

With $4 billion in annual revenue and almost $650 million sitting in its bank account, records indicate, Nabors clearly boasted the resources necessary to beat CIE’s winning offer – especially if it could score more than $325 million worth of assets at a fraction of that price – but it chose to back away before the bid ever reached $5 million (including government-related fees) instead.

CIE officially closed the deal the following month, records show, immediately selling itself to Miller that same day. At that point, records show, Miller formally introduced Graham as its president and touted the “instrumental” role he had played in securing the company’s new assets.

According to corporate filings, Graham scored a $200,000 signing bonus when taking the job – a sum equal to his entire annual salary for serving as president – and warrants to purchase 1 million shares of stock, almost half of them at just a penny a share, as well. The company never asked compensation experts to help determine his pay, records show, or sought prior approval from shareholders to issue the huge block of cheap warrants that he received.

Graham resigned from that post seven months later, due to “conflicting business and personal time commitments,” and took all of those cheap warrants along with him. He could have exercised every one of those warrants for barely $600,000, records indicate, and received company stock worth about $7.5 million – for a 10,000% gain – on the day that he departed. While Miller reported no insider sales during that time period, records show, the company’s stock traded almost 3 million shares – or 10 times the average volume for the rest of that month – on the very day that Graham vacated his post.

Meanwhile, as it turns out, Vulcan never even provided the funds that it had promised to Miller for the Alaska deal. Vulcan transferred that cash to another account, corporate filings show, with Miller settling for alternative financing – at a higher interest rate – after losing access to those funds instead.

Continue to Part 2 >>