TheStreetSweeper
October 10, 2016

Investor Alert: Resolute Energy Corp. (REN) Downside Risk

TheStreetSweeper issues a critical alert for Resolute Energy Corp. ( REN ) investors.

The Denver, Colorado-based oil and gas company's stock blew up to the year's high , after announcing an acquisition and millions of dollars of new debt.

TheStreetSweeper highlights the key reasons we consider this stock very, very risky right now.

*Outrageously Expensive Acquisition

It may sound ridiculous for a company reporting $424,000 in cash and a net loss of $-36.9 million ($-2.44/share) in June to announce plans in October to spend $135 million.

But that's exactly what happened.

REN on Friday completed the acquisition of oil and gas property in Texas for $135 million . The deal consists of $90 million cash and 2.1 million in common stock.

We might wonder where they came up with all that money. Well, REN is able to accumulated another 3,295 acres in the Delaware Basin by tapping its revolving credit facility and cranking out some new preferred stock.

The owners of the 62,500 shares of new preferred stock will be eligible for dividends that common stockholders will not enjoy. And those preferred shares are convertible at any time at ~$29.53 per share.

So the stock is currently trading above the initial conversion price, meaning dilution for existing shareholders.

*Blind Faith

REN is acquiring properties from Firewheel, a teeny oil company reporting only $4.3 million revenue over the six months ended June 31.

These properties "contain estimated proved reserves of 6.2 MMBoe with PV-10 of $45.8 million."

So REN has spent about three times the estimated value of reserves for production that may or may not pan out. This could be a very expensive disappointment for REN, whose own yearly production level has dropped ~4% to 7% from the previous two years .

*Short Squeeze

The enormous stock rally appears to be in part due to a short squeeze.

Average trading volume of 1.7 million tripled to 5.3 million Wednesday, though volume dropped the next day only to advance to 5.3 million on Friday. The float is low at about 10.8 million and the short interest is heavy at 23% of the float. Short interest has risen from around 2.3 million to ~2.6 million.

This is a risky situation for investors. What goes up must go down... probably in a flash.

*One-Year Price Target

Analysts have mixed feelings about the stock, offering seven "buy" ratings and two "hold" ratings.

Rodman & Renshaw initiated coverage Wednesday with a "buy" rating and $32 price target. Wunderlich reiterated its "buy" rating Thursday, raising the target from $25 to $40.

The consensus one-year price target is $32.83 ... but shares are already within a few dollars of that target, indicating what we believe is more potential for sudden decline.

*Conclusion

In the last couple of days REN has taken on multi-millions in debt, slung significant potential dilution at shareholders and found what we believe is a very short-lived market valuation approaching a half-billion bucks. This is reprehensible and we expect significant downside.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in REN and stand to profit on any future declines in the stock price.

  • Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org .

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