Sunday, February 1, 2015

Adding Miller Energy Series C and D Perferred to the specualtive portfolio


Miller Energy is a small oil and gas exploration and production company that has its operations in Alaska. Like many oil and gas producers it has been a victim of the recent collapse in oil prices. It has also been the victim of recent some poor management. It is my view that oil prices will be heading higher later this year as the low oil price exacts its pound of flesh out of the US shale oil producers. The rig count continues to collapse and producers continue to report reductions in capital budgets for new drilling.I will be selectively adding positions in select oil producers to take advantage of this potential increase in oil prices. The market will start pricing in a higher oil price well before everyone realizes what is happening.

I think Miller is in a unique situation and it is severely miss priced at these levels. The company has new management that is focusing more on natural gas production from known reserves (natural gas fetches $6.00 plus per mcf in Alaska) rather than oil reserve growth. The company has some other traits that make the preferred dividend look safer than I think the market originally perceived. That is why the stock is moving higher recently. There is a great article at Seeking Alpha that does an in depth analysis of the Miller preferred. I agree with the thesis and will be buying tomorrow morning. The article is available here.

 Why is this important you ask? Well natural gas prices in Alaska, where all of their production is concentrated, are running at between $6 and $7 Mcf vs $3 to $4 Mcf elsewhere. Most of their production for the current year is hedged at around $6.75 for gas and between $93.97 and $98.71 per barrel for oil. Moreover, the State of Alaska finances 35% to 65% of well costs with tax credits. This will help them as they ramp up production from their proven fields as well as new properties they recently purchased from Savant Alaska, LLC including 25 miles of pipeline to add to their current 75 miles and a new production facility built by BP 20 years ago for $300 million.

Again this is a risky stock and is not suitable for those seeking stability. However it does have over 100% possible upside if things work out. Please do your own due diligence.

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