RAM Energy Partners: The Start Of Something Great Or A Terrific Short?

| About: Halcon Resources (HK)

RAM Energy Resources, Inc. (Nasdaq:RAM) is "an independent oil and natural gas company engaged in the acquisition, development, exploitation, exploration and production of oil and natural gas properties, primarily in Texas, Louisiana and Oklahoma," to quote their website. As recently as last fall the firm had outstanding shares of about 79 million for which the net income figure for third quarter of $0.15 per share looked fairly reasonable. A small E&P firm with earnings is often an interesting play to evaluate. The stock has traded under $2 for much of the year until about a month ago when RAM announced major news.

On December 22, 2011, RAM announced that Floyd C. Wilson had made a capital investment of $275 million in common stock (at $1.25 per share), a $275 million convertible note at 8% (convertible into stock at $1.50 per share), and warrants for another 110 million shares at $1.50, admittedly a premium to the price of RAM at the time. This added about 220 million shares to the current outstanding and another 290 million as part of the convertible note and warrants. That's quite a dilution off of a base of 78 million shares! Yes, the company did receive $275 million as part of the share offering, but the note and warrants are pure dilution. The company also announced a reverse split to become effective February 10, 2012 and reverse splits are rarely positive events for a security.

You can certainly make a bet on worse people than Mr. Wilson who built and then sold Petrohawk Energy to BHP Billiton (NYSE:BHP) for $15 billion. It remains to be seen, however, whether Mr. Wilson can take a firm that had net income of $11.8 million in the third quarter of 2011 and justify a current market cap of $1.1 billion on a pro-forma basis (the transaction has not yet closed). That's a great deal of earnings and value to account for going forward. Sounds more like the valuation of a dot-com and not an energy company!

I come down on the side of a short (at least short-term); this stock should be trading below $3 per share.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in RAM over the next 72 hours.

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