Genie Energy Files Renewal of Exchange Offer

As I mentioned last week, Genie Energy (GNE) is renewing its offer to exchange common shares for preferred shares (GNE-PA). Today, they filed papers with the SEC to begin the exchange offer. 

Here is the are the details.

Investors have until January 15th 2013 to exchange shares one for one. You will have to contact your broker to do the exchange.

It should be interesting to see what happens. The common shares did go up as I expected. However, they still currently trade at a discount ($6.48) to the preferred shares ($6.98). 

I still expect the common shares to move up from here. However, there are some risks so I took some profit over the last couple of days. 

  • All 7+ million of common shares get converted. Once they get converted, there could be huge selling pressure on the preferred as most investors really don’t want the preferreds. So, the price of the preferred could go down after the conversion. 
  • It is possible that if everybody tries to convert, the exchange offer could be oversubscribed. If this is the case, the conversion happens on a pro rata basis. So, you might not be able to convert all your shares. 
  • I am interested to see what happens to the common after the conversion. It is possible that everybody that converted might want to get back into the common after the conversion causing the price to at least stay above $6. 
  • The common shares might be worth more to the die hard Genie Energy fans because they have more of a stake on the upside of the Shale operations after the conversion. 
Like I said, I did take about a $.50 profit on some of my position. I will sell everything if the common shares go above $6.70. I will buy more if the shares go down to the $6.30+ range.
I really do not want to hold the preferreds.
  • Management is intent on doing the conversion. This makes me a little uncomfortable.
  • In the SEC document, it clearly states that Genie might use the preferreds to raise capital in the future. If they do that, it could put pressure on the price.
  • I do not feel comfortable with IDT Energy to generate enough cash flow to support both the dividend and capital expenditure. 
Disclosure: I am long GNE 

Genie Energy Third Quarter Results

Genie Energy (GNE) reported third quarter results this morning. In my analysis of Genie, I thought the stock was undervalued, but I ended up not buying any shares because I was not comfortable with the churn rate of 6.6% a month at IDT Energy.

In the current quarter, the churn rate is still 6.6% and SG&A expenses were up 46.9%. The SG&A expenses were higher because the company is spending a lot of money trying to acquire customers. The management acknowledged that “reducing churn remains a key operational objective at IDT Energy.” However, I believe churn rate will be high unless they change their business model. Currently, customers are not signed to any long term contracts and are not guaranteed to save money. 

I would continue to avoid these shares until results improve at IDT Energy. Right now, the company is a lottery ticket. If investors really want to get into the company, then maybe longer term options might be the best way to play it.

I don’t like the preferred (GNE-PA) over the long term either. They will not have any problem paying the preferred dividend because the float is so small and the balance sheet ($95.5 million in cash/no debt) is very strong. However, if Genie spends a lot of money on the shale initiatives and nothing pans out, the company could be in trouble.

Disclosure:  I do not own Genie.