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The CEO has offered to loan (or possibly buy equity) the money to the company to pay the preferred dividends when the lenders allow. One of its biggest customers, Magnum Hunter Resources, has a $430 million joint venture that should allow the company to become profitable within the next year. The company has a cost advantage in disposing waste water. Gross margins are improving and losses from continuing operations are decreasing despite decreasing revenues. SWD capacity will increase to 32,000 barrels per day early in the fourth quarter. GreenHunter Resources (NYSEMKT: GRH ) is a small company that is dedicated to dealing with the disposal and treatment of waste water that is a byproduct of the fracking of wells and the production of oil and gas (primarily). “Today, GreenHunter Water owns and operates salt water disposal wells, a fleet of disposal trucks, including 407 condensate trucks and dispatches third-party trucks, as well as, barging and pipeline operations for the efficient and safe transport of water for disposal.” The above quote from the company website neatly describes the company’s operations. The company exited other operations in Texas and Oklahoma to concentrate on the Utica Shale and Marcellus Shale in the Pennsylvania-West Virginia-Ohio region (possibly even a little bit of Kentucky). As such, it exited Oklahoma before it got caught in the earthquake controversy there. The company maintains that it has a cost advantage in its current area of operations and it is trying to build on that cost advantage. The company claims to have one of the most modern truck fleets in the business. All of the trucks are licensed to carry hydrocarbons, which implies that there can be alternative uses for the trucks should the situation arise; however, at the current time, the emphasis is on waste water disposal. Recently, the company added two disposal wells and seeks to add two more disposal wells. The two new wells increased disposal capacity by approximately 40%. When the four wells have approval and are operating, the company anticipates that it will have a total capacity of 32,000 barrels of water per day. To accomplish its goal of adding capacity, the company issued notes in the amount of $16 million (in two draws of $13 million immediately and $3 million within six months) that allowed the company to finance the new wells as well as add trucks needed to support the transport of water and fluids. The interest rate is nine percent and the company must pay a royalty of twelve cents per barrel disposed from September 2015 to the first twelve months after the notes have been paid in full to the lenders. The notes mature in 36 months. That is not a lot of time for the company to become profitable enough for a refinance with longer terms. Still this financing has allowed the company to accomplish at least some of its growth goals. The company has spearheaded an attempt to barge the waste water using the waterways of Ohio. “Our estimates show that a single 10,000 barrels of brine barge will remove in excess of 600 hours of water truck traffic.” The above quote from the company’s website explains why the company has spent years and asked for help from Congressmen to get the Coast Guard moving on this proposal. The company is obviously looking to enhance its low-cost advantage in disposing of waste water. Recently, the company reported Coast Guard approval for the process, but there is more to go with the proposal before barging can actually begin. Shareholders need to hope that the savings projected actually materialize and make the time and money spent on this proposal worth the effort, as the company has spent years on this proposal. The company does claim barging is very safe and will not pollute the waterways with the waste water transported. The company’s SWD wells are all located in Ohio and West Virginia “GreenHunter Pipeline LLC, through the construction and development of multiple pipelines, will engage in the transportation of brine, freshwater and condensate. In addition to transportation, the pipeline destination will also include a processing facility to split condensates into different quality products, typically resulting in higher value for these finished materials. The first phase of the project has begun with right-of-way negotiations underway and is scheduled to be complete and 100% operational in 2016.” This quote from the company’s website shows that the company is thinking about the future. After a certain point of development is reached in a field, the operator usually seeks to connect the wells up to pipelines for the various products and by-products as the cheapest way to transport fluids from the field to processing, and finally to the sales destination. The company is seeking to transport waste water as well as condensate and treat the condensate. This avenue usually represents the final move by most operators to save money for these byproducts and waste materials. At some point in the very distant future, the fields in the area are mature, trucking needs should be very minimal and pipelines will take care of much of the demand for this service. But that is fairly far in the future, as these fields have a long way to before they can be called mature. The CEO and Chairman of the company is Gary Evans. He has several decades of experience and is also the chairman of Magnum Hunter Resources (NYSE: MHR ). He had built a similarly named company in the past and sold it, so he has experience building companies in this industry. With his experience, the company has found a niche in which it can compete effectively. One of the largest customers of the company is Magnum Hunter Resources. So to some extent the companies are linked. With Magnum currently reporting losses, and may report losses in the future, those losses affect the ability of Magnum Hunter to grow and use the products of GreenHunter Resources. Against that, Gary Evans appears willing to invest in either company should they need more resources, and he has loaned both companies money in the past. In the current second-quarter conference phone call, he has indicated a willingness to lend this company money in the future. That vote of confidence from the CEO cannot be ignored. Plus senior management owns a majority of the stock. They can effectively run the annual meetings to their advantage and to the disadvantage of the minority shareholders. This, however, is very unlikely to happen. In the long run, the major investment by senior management of the company in the common stock of the company is a very good sign. Despite the drop in revenues , as fees decreased across the industry for this service and many other services, the company is clearly in a growth phase. There was a lot of good to report in the second quarter. Gross margins on water disposal went from 32% to 42%, and internal trucking margins roughly doubled. SG&A decreased 19% to $1.7 million. The loss from continuing operations was $2.0 million vs. $3.3 million the year before. While that is some improvement, the company needs to aim for profitability. On the balance sheet, the current ratio is a little weak at 0.8:1, but not so weak as to doom the company. The company is fairly leveraged, with long-term debt nearing twice the amount of equity. As part of the recent loan, the company must raise $2 million in equity before the end of the year. The recent loan also requires that the company not pay preferred stock dividends until certain ratios come into compliance for two quarters. Since the company is going to require a fair amount of cash to build the required pipelines and grow, the equity requirement is a drop in the bucket. Of far more consequences to the preferred shareholders is when they think the company will meet the ratios required by the loan. The company had a good history of paying the preferred dividends before this deferral. The reason for the deferral appears to be the delays in getting the new SWD wells approved to operate. Even though these wells are converted wells and, therefore, cost far less than drilling a new well for these purposes, the approval delays are very costly to the company. Therefore, the preferred shareholders will probably have to wait until the last disposal well is approved in October and operating. The loan agreement and amendment appears to specify a longer time period, but given the company’s history of paying the dividends, and the comments made on the second-quarter conference call, an investor could assume that the company will make a legitimate attempt to begin paying the dividends again later this year and catch up the arrearage. Since the preferred stock has fallen below ten dollars a share ($8.38 as of today, September 14), this makes the preferred stock a speculative investment vehicle at this time, with the potential to more than double by the end of the year plus considerable dividend payments. Although, it is justifiably tempting for the average investor to wait for the stock to stop falling before investing. Magnum Hunter Resources, one of the largest customers of the company, announced a joint venture where the partner will invest more than $400 million. This amount of activity by Magnum Hunter Resources will drive GreenHunter Resources into profitability, assuming that the trends (ratio improvements) noticed on the income statement trends underway continue and hopefully increase favorably. This also assumes that GreenHunter continues to get all of Magnum Hunters’ applicable water disposal business. So profitability for this company within a year is very possible, and even with the dilution through equity raising, this stock offers a speculative value investment play on the oil industry. It is slightly safer than the average oil and gas exploration play in that no matter who discovers the oil, this company will be disposing of the waste water in the area and hopefully processing a significant amount of condensate in the future. Disclaimer: I am not an investment advisor and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents, and press releases to see if the company fits their own investment qualifications. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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