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 

Arbitrage Opportunity on Genie Energy

Genie Energy (GNE) reported yesterday that will renew its offer to exchange common shares for preferred shares (GNE-PA). I reported about the interesting exchange offer last month.

To recap the offer, investors have the right to exchange their common shares on a one to one basis for the preferred shares. The preferred has the following features:

  • Has a liquidation preference of $8.50 per share.
  • Annual dividend of $0.6375 per share.
  • Redeemable following October 11, 2016 at 101% of the Liquidation Preference plus accrued and unpaid dividends.
  • Redeemable following October 11, 2017 at Liquidation Preference plus accrued and unpaid dividends,
  • Genie does not have to redeem the issue at all.
  • It is senior to the common shares.

This presents an interesting option because the common stock is trading around $6 and the preferred is trading around $7.  You could potentially buy the shares of the common stock at $6 and exchange it for 7 after conversion.

Obviously, you could short out the preferred. However, there is not much liquidity on the preferred.

I was able to buy shares at $6.01-$6.15 this morning. I expect the common and preferred to converge.

At current common stock price ($6 and change), you are getting a yield of over 10% (.6375/6). Like I said, they should have no problem paying interest on the preferred for a while, since they have a strong balance sheet. 

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.

Gne Preferred Start Trading

Gne Preferred (GNEPA) started trading today. As expected, the volume is really low. As of 12pm EST, there has been 1750 shares traded and the stock is $7.89. It is trading at around a 8% yield. Investors who exchanged the common shares are making a profit at the current price. The common was around $7.30 when the shares were exchanged one for one.

The dividend should be safe since GNE has plenty of cash and only 1.6 million shares are outstanding. GNE will only have to shelve out $1 million yearly on dividend payments. I expect the preferred to trade in the $7-$8 range. 

Read our article on GNE here.

Disclosure: I do not own shares of GNE.