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Summary Wild recent price swings in GRH-PC. Preferred dividend was deferred in July, but company expects to restore dividend before the end of the year. Analysis of the Q2 report, conference call and preferred stock covenants. Gary Evans is well known to energy investors as the founder of Magnum Hunter Resources (NYSE: MHR ). Gary Evans also founded and controls the much smaller GreenHunter Resources (NYSEMKT: GRH ). GRH is focused on waste water disposal. They primarily handle waste water produced from natural gas wells in the Appalachian region. In addition to sharing the same CEO, MHR is also GRH’s largest customer. MHR has had more than its share of drama lately. The stock has had huge moves due to volatile commodity prices, debt covenant changes and speculation on asset sales. The speculative GRH-PC preferred stock has become almost as volatile lately. No one will ever accuse Gary Evans of running a dull company. GRH-PC is a par $25 cumulative preferred issue with a 10% coupon. See prospectus for additional details. At a recent price of $9.85, GRH-PC is trading at under 40 cents on the dollar. Preferred stocks are often far less volatile than common stock issues, but this has not been the case for GRH-PC. Over the past month GRH-PC has plunged from over $19 to a low of $7.50. It then bounced back to $15.50 before drifting back down below $10. GRH-PC seemed to be on track back in early July when I wrote this article . The company had just successfully closed a new secured credit line to fully fund capital projects. They were operating at 100% of capacity and turning away potential customers. Margins were increasing and badly needed new disposal well capacity would enable them to quickly ramp up revenues and cash flow. What went wrong?” The licensing of 2 new disposal wells took longer than expected due to regulatory delays. The new disposal wells are now online and have increased waste water disposal capacity by approximately 50% (see Q2 conference call discussion). With additional disposal wells coming online over the next few months, GRH will have doubled its disposal capacity as compared to Q2 2015 levels. Revenues and cash flow are headed higher over the next few quarters. Unfortunately, regulatory delays caused EBIDTA to ramp up more slowly than expected. This caused a covenant violation on the company’s new secured credit line. The covenant violation prevented the monthly preferred stock dividend from being paid in July. This led to the crash in GRH-PC. So how long will the GRH-PC dividend remain deferred? As per the Q2 conference call comments by Gary Evans, the company hopes to end the deferral “sometime before the end of the year”. Note that since GRH-PC is a cumulative preferred issue, the company would be required to eventually make up any missed dividends. Here’s a key excerpt from the Seeking Alpha conference call transcript: Unidentified Analyst Okay, alright. And then I suspect that the lender for the $13 million is — you are not paying any cash out so I make sure you’re paying me, do you have to get back to that $1 million of EBITDA, before on a LTM basis, before they would let you do this seriously? Gary Evans – Chairman and CEO No, we have an amendment that’s been executed this morning that gives us flexibility and yours truly will probably be the one putting some more capital in to get back to paying the dividend. So, our goal is to get back to paying those dividends sometime before the end of the year. Unidentified Analyst Okay. And how quickly can you catch up on the accumulated part? Gary Evans – Chairman and CEO We can do it tomorrow, if we wanted to. Gary Evans owns a majority stake in GRH (see proxy statement ) and is committed to the company’s success. As per the conference call excerpt above “yours truly will probably be the one putting some more capital in to get back to paying the dividend”. GRH-PC is senior to the common stock owned by Gary Evans. It’s very comforting to see a CEO stepping up personally to help out when a company runs into trouble. Of course there is no guarantee that GRH will be able to able to successfully restore the preferred stock dividend this year. The favorable protective covenants of GRH-PC become more critical if the deferral lasts longer than expected. Some of these covenants are detailed on page 72 of the prospectus: Failure to Make Dividend Payments If we have committed a dividend default by failing to pay the accrued cash dividends on the outstanding Series C Preferred Stock in full for any monthly dividend period within a quarterly period for a total of four consecutive or non-consecutive quarterly periods, then until we have paid all accrued dividends on the shares of our Series C Preferred Stock for all dividend periods up to and including the dividend payment date on which the accumulated and unpaid dividends are paid in full: (NYSE: I ) the annual dividend rate on the Series C Preferred Stock will be increased to 12% per annum, which we refer to as the Penalty Rate, commencing on the first day after the dividend payment date on which such dividend default occurs; (ii) if we do not pay dividends in cash, dividends on the Series C Preferred Stock, including all accrued but unpaid dividends, will be paid either if our common stock is then listed or quoted on the New York Stock Exchange, the NYSE Amex or The NASDAQ Global, Global Select or Capital Market, or a comparable national exchange (each a “national exchange”), in the form of our fully-tradable registered common stock (based on the weighted average daily trading price for the ten business day period ending on the business day immediately preceding the payment) and cash in lieu of any fractional share As noted above, the GRH-PC coupon would be increased from 10% to the 12% penalty rate in the unlikely event that the deferral is not ended within 1 year. Preferred holders have another ace up their sleeve. After 1 year of deferral, dividends “will be paid” in common stock. Unlike a cash dividend payment, dividends paid in GRH shares would not violate credit line covenants since they are not a cash cost. Gary Evans may be working so diligently to get the preferred dividend restored ASAP in order to avoid having his equity stake diluted. MHR is GRH’s largest customer and their fortunes could help determine how fast the GRH-PC dividend is restored. As discussed on the conference call, MHR is now finalizing a joint venture agreement with a private equity partner. This could lead to a substantial increase in natural gas drilling. Additional drilling would increase demand for GRH’s waste water disposal services. There is also a downside to the MHR relationship. The Q2 report shows that the “related party accounts receivable” has doubled since December. Expected improvements in MHR’s liquidity from the JV or expected sale of midstream assets would also improve liquidity at GRH. Aggressive yield investors should consider the deferred dividend GRH-PC as a speculative play at 40 cents on the dollar. The heavy insider ownership of the GRH common stock, improving business fundamentals and strong protective covenants are very positive. This wild GRH-PC roller coaster ride may soon be headed higher. 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 am/we are long GRH-PC. (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. Additional disclosure: The author is the publisher of the Panick Value Research Report. The Panick Report is focused on high yield preferred stocks, mrpanick@yahoo.com for the 2 week free trial. Scalper1 News
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