Genie Energy: As Successful As Its Parent, IDT?
- GNE is a small, diversified energy company focusing on Israel's huge "Black Gold"Potential.
- GNE is an IDT offspring with the same Howard Jonas at the helm.
- GNE may well be worth the risk at current valuation.
Genie Energy LTD (NYSE:GNE) was spun out of one of my favorite (and previously covered) companies, IDT Corp., in 2011. One of my criteria in seeking the great companies of the future continues to be their management. With GNE, we once again get Howard Jonas, its Chairman and CEO, who created substantial wealth for IDT shareholders over the years. The question is whether he can do it again. Given where GNE is today and what its strategies are, my answer is a resounding "yes". However, for anyone who is thinking about a short flip, this is not the place to be.
GNE through its subsidiaries operates as a retail energy provider and a developer of two oil and gas exploration companies. The company operates through three segments: Genie Retail Energy, Afek Oil and Gas, and Genie Oil and Gas. It resells electricity and natural gas to residential and small business customers primarily in the Mid-Atlantic and Midwestern United States. The company also has a 86.5% interest in the exploration project in the southern portion of the Golan Heights in Northern Israel; has an 86.4 interest in an oil shale exploration project in Central Mongolia, as well as an 86.1% interest in an oil shale development project in Israel. [via Yahoo Finance]
This under-followed, undiscovered, Newark, N.J.-based, $166 million micro-cap has several exciting ventures that may prove rewarding for the patient investor. First, GNE Retail Energy, founded in 2004, is one of the largest independent residential energy providers (REPs) in the eastern United States. GNE Retail Energy currently serves 394,000 customers, of which 267,000 are electric meters and 126,000 gas meters. Future growth will focus both on geographic expansion and penetration of existing markets. Under this structure, customers benefit from possible savings on their utility bills, while the Utility Company purchases the receivables and generates revenues from consolidated billing while the REP takes the load-based risk. With revenues of $58,138,000 for the quarter ending March 31, 2016, this segment of the company keeps the lights burning (Pun intended). Net Income for the March quarter amounted to $6,116,000, or $0.26 per share on a fully diluted basis. The company declared a dividend of $0.06 per shares, which has been accounted for as a return on capital.
Since this segment of the company must be looked upon as falling within the utilities sector, with that comes the risk of government oversight and control. For instance, in February, the New York Public Services Commission (PSC) issued an order enacting new regulations that would impose significant new restrictions on retail REP providers operating in New York. A group of parties from the REP industry subsequently sought and obtained a temporary restraining order (TRO) to block implementation of the PSC's order pending a definitive judicial review of the industry's challenges. The TRO is still in effect at this point in time. (Source: GNE first quarter 2016 results, dated May 4, 2016)
On July 13, the NY PSC issued yet another order, this one would prohibit selling to low income persons. In its effort to expand geographically, the company is seeking the most friendly oversight commissions in an attempt to mitigate such bureaucratic interference.
A Possibly Very Exciting Future
While GNE Retail generates much needed current revenues and earnings, the company is engaged in two Israeli ventures that might change the face of the Middle East. First, Afek Oil and Gas has discovered what appears to be an oil resource with significant potential in Northern Israel. Preliminary results from the analysis conducted to date suggest that there may be large resources of gas. Additionally, robust amounts of light liquid hydrocarbons may be concentrated in regional "sweet spots" within a complex, multifaceted reservoir. Afek's scientific team, in conjunction with leading international experts is analyzing the well test and other data to enhance its model of the reservoir, optimize the well flow tests and determine the next steps which may involve flow testing at additional completed wells, undertaking additional seismic work, drilling new exploratory wells or initiating other activities. Afek has begun to seek additional financing to support further exploration activities, potentially by accessing the public markets, which could spearhead a process by which Afek would become an independent entity. (Source: Ibid) The discovery of oil in Israel could transform the country into a world energy power, especially since early results indicate the layers of oil may be ten times thicker than the global average.
GNE Oil and Gas is comprised of oil shale projects in Mongolia and Israel's Shfela Basin. While these oil shale projects are currently inactive, a further increase in the price of hydrocarbons from current levels will make these projects attractive contributors to the GNE's bottom line.
GNE's twelve months high of $14.97 compares to its recent twelve months low of $6.16. At its current price of $7.09, GNE may be an exceptional investment for the patient investor for several reasons. First, GNE Retail Energy is a major, profitable segment of the company with significant growth prospects of its own. Second, the potential for being an important factor in transforming Israel into an energy behemoth may turn GNE into major energy behemoth in its own right. But it all comes back to management. Not only is the company headed by a proven winner in Howard Jonas, he is supported by a strong Board of Directors as well as an Advisory Board whose members include Rupert Murdoch, Chairman and CEO of News Corp., Jacob Rothschild, scion of the prominent banking family as well as hedge fund manager, Michael Steinhardt. Finally, chief scientist, Harold Vinegar PhD has previously served as chief scientist of Physics at Royal Dutch Shell. He spent 32 years at Shell's Bellaire Technology Center in Texas working on new hydrocarbon exploration and production technologies.
This investment requires investors who can withstand the headwinds that will surely appear as they do with any young, high growth potential investment. But as long as there is very competent shareholder- friendly management working for us, these periods can be navigated. Timothy F. McCusker, Chief Investment Office at NEPC consultants said it best when he stated that "doubt can be a pesky thing. Once infected with it, it is hard to shake off. It makes you second guess what you thought you were sure of. It is contagious too. And there is no flu shot for it." With GNE, these periods of doubt will appear, but they will, hopefully be short lived and well worth the pain.
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