Genie Energy: Small Cap Value Stock With Upside 'Call Option' Attached

| About: Genie Energy (GNE)

Genie Energy Ltd. (NYSE:GNE), together with its subsidiaries, provides sustainable and reliable sources of energy. The company engages in supplying electricity and natural gas to residential and small business customers in New York, Pennsylvania, and New Jersey. It also provides transportation fuels from the oil shale and other unconventional fuel resources, as well as holds interests in oil shale development initiatives in Colorado and Israel.

The Company was recently spun off of IDT Corporation (NYSE:IDT), a public company with a variety of telecom and other interests; therefore, no one knows about this stock. There are no analysts who cover the stock. This is something I look for when trying to find deep value stocks because they are undiscovered by the masses.

I will walk you through my investment thesis for why I think this stock is undervalued and has a "free call option" on some potentially large gains.

First, The Company trades at $6.70 a share, and has a market cap of approximately $150 million with cash on the balance sheet (with no debt) of over $100 million or $4.43 a share. Therefore, the Company only has an enterprise value of around $50 million. The Company has over $175 million in revenues and normalized EBITDA of around $25 million which all are currently generated by the utility business alone. Therefore, it currently trades at less than 0.3x Enterprise Value / Revenue and 2-2.5x Enterprise Value / normalized EBITDA.The Company pays a 3% dividend and has a $20 million stock buyback in place.

The Company has two businesses:

1. A basic cash flow business that generates about $25 million in annual normalized EBITDA. IDT Energy - This business is a retail energy provider supplying electricity and natural gas to residential and small business customers in the Northeastern United States. Nothing overly exciting here other than the fact that the enterprise value of GNE is $50m and this subsidiary makes $25m in annual normalized EBITDA. It continues to grow its customer base quarterly.

2. The exciting part of the business. This is a call option that it appears is being assigned no value in the market. What is it? It's two huge, exclusive shale oil plays - one in Colorado and one in Israel. This subsidiary is called Genie Oil and Gas. And before you say, whatever, another speculative oil and gas play, listen to this... Lord Jacob Rothschild and Rupert Murdoch recently acquired 11% ownership of this subsidiary for a valuation of this subsidiary alone at $200m (more than the entire current market cap of GNE). Genie Energy's advisory board also includes hedge fund legend Michael Steinhardt and former United States Vice President Dick Cheney.

In Colorado, the company has partnered with Total SA (NYSE:TOT) in a 50% joint venture and was given one of four exclusive licenses (the others went to huge oil players). Total SA is committed to footing much of the bill to get the venture operational. In Israel, it has an exclusive license and the guy who runs the Israeli operations is former chief scientist at Royal Dutch Shell (NYSE:RDS.A). I would note that both of these projects are long term in nature and are using technology that is not guaranteed to perform.

However, there are potentially 10 billion barrels in its Colorado asset and 40 billion barrels in its Israeli asset. I believe Exxon has like 85 billion barrels in total reserves. The CEO thinks the company could be worth 1/2 of Exxon (NYSE:XOM) if they prove to get the oil out of the ground using their technology (make sure to read page two of the CEO link). That's over $180 Billion! Who knows if that is true, or if they can ever get much of the oil out of the ground, but clearly huge potential here and you aren't even paying anything for it at current prices in my opinion.

This oil shale business which currently generates no revenues is fully supported by the cash flow from GNE's "utility" business (meaning, they aren't burning any cash). Even with the several million dollars GNE spends on the oil shale business development annually, it is still profitable and cash flow positive overall. You get value in the utility business and $100 million in cash on hand, plus a call option on gains from the oil business all in one. The company even pays a 5 cent quarterly dividend, so you get paid to wait.

Another thing I really like is right after the spinoff, insiders bought significantly more GNE stock at over $9 a share and many of these folks already owned large stakes in the company. This shows they believe.

GNE was mentioned in Kiplinger's just last month with a price target double the current price. Finally, here is a link to a variety of investor presentations that will tell you more.

At face, it appears there is value in the stock at current prices just based on the utility business with a lot of possible upside if the oil shale plays/technology play out.

Disclosure: I am long GNE.