TheStreetSweeper issues an investor alert for Resolute Energy Corp. (REN).
Considering this stock's flight to a mind-blowing $20 per share early this week, investors would never guess the pathetic condition of this Denver-based oil and gas company's finances nor its junk status nor its huge 2Q loss of $-2.44.
The stock jumped following the Aug. 8 2Q report that the board had approved continued drilling in 2016 and average daily oil production improved from 9,016 barrels the quarter earlier to 11,865 barrels. What wasn't announced is the recent production level is a ~4% to 7% drop from the previous two years.
The market pushed up Resolute and other oil companies' stock with the crude oil rally on Aug. 15.
In a heartbeat, everything changed.
Mr. Sutton owns 2.1 million shares of the company stock. Considering the stock price has nearly tripled this month, TheStreetSweeper thinks it wouldn't be a bad idea if he chooses to sell a bunch of shares and ride off into the sunset.
It's unclear how smoothly the company can replace the man who has been CEO since the company's founding in 2004. Mr. Sutton will stay on as executive chairman but the new chief executive will be Richard Betz, a manager since 2004 and chief operating officer since 2012.
Below are five more big reasons TheStreetSweeper is warning investors that this stock will almost undoubtedly suffer a rapid, tooth-rattling drop from the current ridiculous levels.
*1. Reverse Stock Split: Stock Flies
Resolute stock looked like one big empty oil tank when it pulled a 1-for-5 reverse stock split effective just two months ago, on June 8.
The maneuver worked better than anyone might have imagined, rocketing the stock nearly 3,000%.
The stock split put Resolute in compliance with the $1 per share minimum requirement. The reverse split also helped improve the valuation following its latest New York Stock Exchange delisting notification received last November. The company had been out of compliance because market capitalization and shareholder equity have each dropped below $50 million. The exchange will continue to monitor those factors.
*2. Wandering In: Wunderlich, Etc.
Within days after this stock split, investment analysts began lining up to put in their two-cents worth about Resolute.
Barclays analysts on June 14 maintained an "underweight" rating and raised the price target from $1 to $4.
On July 11, Wunderlich Securities upgraded the stock from "hold" to "buy" and set an $8 price target, up from $4. The very next month, the firm raised the PT two more times ...
On Aug. 10, Wunderlich raised the price target again... this time to $15.
Despite no Resolute news (and bad news about oil prices and the CEO departure just two days away), on Monday, Aug. 24, Wunderlich raised Resolute's price target to $25, triple the July figure.
Other firms' Resolute ratings are shown below.
Wunderlich, Barclays and Johnson Rice each shared underwriting responsibilities for the company's 16.25 million share offering at $8.22 back in May 2013. We can only imagine that these firms would also be interested in handling any future underwriting duties.
*3. Downgraded: Junk Status
Resolute had already been suffering from a junk rating when its deteriorating credit quality spurred Standard & Poor's further downgrade ... just four months before the reverse stock split and the odd glut of analyst attention:
(Source: Seeking Alpha)
*4. Financials: Miserable
Despite the previous underwriters' sudden optimistic reports on Resolute, the oil company has endured a tsunami of bad financial deals, including:
*Cash decline to $424,000 ... from $9 million in December:
*Selling assets - as recently as August - to pay down debt.
*Sold off ~$275 milllion worth of property last year.
*Enduring an 8.5% interest on debt, more draconian terms expected due to poor credit rating.
*Total $639 million in liabilities.
*In the last six months, revenue has dropped to $54.4 million, a 38.7% deterioration from a year earlier.
*Expects to spend $60 million to $70 million on lease operating expenses this year.
*Annual production target for 2016 is about the same as the volume produced in 2015 and earlier ...
...Yet, in 2015, the stock traded below $9 per share:
(Source: Yahoo Finance)
*All those financial details call into question Resolute's ability to match its 2015 revenue by earning another $100 million by year's end.
*5. Company Loses: Executives Gain
While leaders oversee the company's losses, the top five managers have received over $6 million in total compensation:
(Source: Company SEC filing)
Reverse splits like this are always a sign of horrible things to come. Typically, companies engineer reverse splits to clean up a mess, and the stock pops not on the merits of the business but because investors perceive less risk.
In the blink of an eye, then, such shares plunge back down, often on another dilutive stock offering.
In fact, researchers have found reverse splits continue to lose value: "These stocks record statistically significant negative abnormal returns over the three-year period following the month of the reverse split."
Pile that reverse split on top of the abrupt drop in oil prices and change in leadership, massive financial concerns and the financial institutions' absurd reports -- and Resolute looks like an irresolvable mess poised to drop about 70%.
TheStreetSweeper fully expects Resolute stock will suddenly tank to a more reasonable valuation of about $5.50 per share.
* 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 email@example.com.