Miller: Meltdown Continues for This Once-Hot Oil Stock

by Melissa Davis - 8/23/2011 4:32:20 PM

Late Friday, with its stock hammered on questions raised by TheStreetSweeper in a big investigative report, Miller Energy Resources (NYSE: MILL) rushed to soothe nervous investors with a clean – but prematureaudit opinion on a tardy annual report that otherwise looked like an ugly mess.

That formal 10K filing included a crucial blessing from KPMG that lent credibility to financial statements previously approved only by a tainted small-time auditor, notorious for validating the books of dubious Chinese-reverse merger companies, instead. Three days later, however, Miller quietly published an 8K on its company website – absent for up to an hour (or more) from the official website operated by the U.S. Securities and Exchange Commission – revealing that KPMG had yet to even complete its audit of the financial statements that it had reportedly approved.  Miller further disclosed that its own audit committee had determined over the weekend, a period marked by hopeful celebrations among relieved investors, that the company’s brand-new financial statements – as well as the audit attributed to KPMG and the consent to use that audit report -- “should not be relied upon” because of looming revisions down the road.

Miller’s stock, which recorded double-digit gains on reports of the audited financials early Monday morning, soon began to tank on news of the 8k filing before that document even surfaced – where investors could easily find it – on the SEC website. The shares plummeted from a high of almost $5 to a low beneath the $3 mark, sinking a total of 42.8% in less than two hours, after the company dropped its alarming bombshell. Although the stock has since clawed its way back toward $3.50 a share, it still fetches half the price that it commanded before TheStreetSweeper first exposed Miller as a risky company less than a week ago.

Peter J. Henning, a law professor who formerly served as a senior attorney for the enforcement division of the SEC, suggested that the company could face even more pain – including possible backlash from securities regulators and its new auditing firm alike – as a result of its recent actions.

“The SEC is going to notice this,” said Henning, who worked as both a regulator and a prosecutor before assuming his current post as a law professor focused on white-collar crime at Wayne State University. “You can’t file a 10K without audited financials; that’s a precondition … I suspect that KPMG will want to know how this happened and, if they don’t get straight answers, they will be gone.

“It looks like somebody, somewhere, had to have lied,” concluded Henning, who writes a popular column for the “White-Collar Watch” section of The New York Times. “It’s hard not to draw any conclusion other than that this was basically fraud.”

For its part, Miller waited until the final hour of trading on Monday before it even began to publicly address the company’s bizarre actions. In an open letter to shareholders, Miller CEO Scott Boruff finally came forward to portray the recent 10K filing as an unfortunate accident. Specifically, he claimed that “a form of KPMG’s audit opinion” had been “inadvertently included” in the 10K (by unnamed parties) because the auditing firm had not actually released that report – and its consent to use it – to the company yet.

To skeptics, however, that excuse looks rather lame at best (and downright fabricated at worst). After all, they note, Miller had already spent an extra two weeks finalizing that report ahead of a widely anticipated release that had attracted considerable attention by the time that it occurred. Far from another routine 10K filing, critics emphasize, this particular annual report – the first-ever reviewed by a Big Four auditing firm – could bring fresh credibility to a company that had raised escalating suspicions after bursting free from the penny-stock arena to secure a listing on the Nasdaq and ultimately the prestigious New York Stock Exchange.

In short, critics note, Miller found itself operating under a powerful microscope – with even CNBC monitoring the once-obscure company – by the time that it finally released its overdue report. Miller’s four highest-ranking executives, as well as six outside directors, all signed off on that annual report the day before its release. After that, video footage shows, the CEO then personally assured CNBC that the company would file its audited 10K just hours before that long-awaited annual report finally appeared. The report included a so-called “comfort letter” from KPMG, dated on the same day as the 10K itself, which upheld the validity of those financial statements.

As outlined above, however, Miller would soon reveal (through both an 8K and a letter from its chief) that the company never secured a formal blessing from its auditor before filing its annual report at all. As a result, Miller explained, the company has yet to file a “complete” annual report – which requires audited financial statements – and now fails to meet listing standards established by the NYSE for stocks that trade on that preeminent exchange. 

With Miller already bracing for a warning letter from the NYSE as early as this week, critics say, the company could soon find itself scrambling – but potentially failing – to protect its coveted listing on the world’s leading stock exchange.  

Miller investors have already paid a high price – in record time -- for betting on the company in the meantime. The stock plunged from an all-time high of $8.04 to a 52-week low of $2.81 a share in the span of half a month and, even at its current price of $3.37, still hovers near the bottom of that far-reaching range. 

The Ugly Truth

Even when Miller first issued its new financial statements, skeptics felt, the clean audit opinion from KPMG looked like nothing more than a pretty decoration on a rather ugly annual report.

For starters, that filing reveals, Miller already faces a crackdown by SEC regulators demanding omitted financial statements for three acquired companies – including a core Alaskan subsidiary that reshaped its parent’s books – before they will approve the crucial paperwork necessary for additional stock sales. Miller claims that it was unable to supply the financial reports for its new Cook Inlet Energy (CIE) unit in Alaska, an addition that now accounts for the vast majority of the assets and revenues on its books, because the former owner of those assets failed to maintain proper records before filing for bankruptcy and abandoning its operations. Miller further states that it does not believe that it can obtain those audited financials, either, “which will adversely impact our ability to raise additional capital” unless the SEC – unbending so far – decides to change its mind and waive those mandatory reports.

As a result, Miller now looks entirely dependant upon a new $100 million credit facility to finance its big exploration plans. But Miller has failed to meet a key obligation set forth in that credit agreement, records indicate, which requires the company to supply audited financial statements no later than 75 days after its fiscal year ends (a deadline that passed in mid-July) in order to avoid a technical default. By tripping that covenant, records suggest, Miller could see its interest rate on that loan – already steep at a minimum of 9.5% -- jump to credit-card levels of 16.5% if the company retains ongoing access to those funds, rather than immediate demands for repayment, at all.

From the start, records indicate, Miller faced onerous restrictions whether the company remained in compliance with that credit agreement or not. Under the terms of that deal, records show, Miller must request any new funds from that account weeks in advance – while it waits, at the mercy of its lenders, for a decision – and then use 90% of its net revenue, starting in January, to begin paying off the money it has already borrowed along the way. Miller will see that entire loan mature in mid-2013, or less than two years from now, with the company apparently banking on a dramatic surge in revenue to cover the bill if it blows through the full $100 million by that time.

Miller initially secured permission to borrow $35 million from that account this June, records indicate, and has already spent at least $10.87 million of that money at this point. The company used a sizable chunk of that total to repay an earlier short-term loan from PlainsCapitalBank, secured with stock pledged by its CEO and his father-in-law (the founding chairman), that was scheduled to mature just a few weeks later. By paying off that loan in full, records indicate, Miller eliminated the brief risk taken by those two insiders when they pledged a portion of their massive stock holdings as security for a temporary credit line soon replaced by the current facility.

When the CEO issued his letter to anxious shareholders on Monday, however, he specifically emphasized that Miller insiders had “personally put themselves on the line” by guaranteeing that loan from PlainsCapital Bank without reminding investors that the company had since eliminated that same risk by paying off the credit line

Boruff then sought to further reassure investors by suggesting that senior management would soon begin increasing their stock holdings in the company as well. Notably, however, Boruff stopped short of stating that executives would buy their stock at market prices – sharing the same risks shouldered by ordinary shareholders – or simply exercise cheap stock options, many priced below 50 cents a share (including some, held by the CFO, set to expire next month) instead.

To be sure, Miller has showered its CEO with enough cash to buy a decent chunk of market-priced stock and restore some much-needed confidence in the company. After all, a local news article reveals, Boruff felt flush enough to spend almost $10 million buying and furnishing an enormous mansion – as large as several giant celebrity homes combined – that ranks among the “most lavish” houses in the company’s future home base

While Miller is currently headquartered in a small town located an hour away from its chief’s rambling estate, the company recently inked a deal for a new corporate office – located just 10 miles away from that mansion instead – and spent a big pile of precious cash, further depleting its modest bank account, to become a major owner of that fancy office complex as well. Miller presently occupies a corporate office measuring 4,968 square feet (with a 6,600-square-foot shop building to boot), records show, but it has recently disclosed plans to move into a new office – covering just 4,156 square feet – in larger Knoxville, within minutes of its CEO’s home, “in order to accommodate the growth of our company and additional employees.”  

The Red Flags

Miller actually delivered some weak financial results, overlooked by many, before dropping its big bombshell on the market this week.

The company fell well short of its ambitious revenue targets, its 10K filing shows, while reversing a year-ago profit (generated through a hefty, but controversial, acquisition-related gain) by posting a sizable loss for the latest fiscal year instead. Ever since Miller acquired its new Cook Inlet Energy (CIE) subsidiary in Alaska back in late 2009, records show, the company has indicated that it would likely generate $30 million worth of annual revenue from those celebrated assets (purchased for just $4.5 million in a bankruptcy auction and then valued at more than $350 million on its books). As it turns out, however, Miller posted sales of barely $20 million – almost one-third lower than the company’s CIE revenue target – from the oil and gas produced by all of its assets combined. 

While Miller increased its annual revenue by $17 million last year, a 290% jump (from a modest base) that looks rather impressive on paper, the company also increased its annual expenses by an even higher $20.7 million during that same period. Miller posted total expenses of $37.9 million, more than double the expenses reported for the previous year, with the company spending more on overhead – particularly compensation for its well-paid insiders and outside consultants – than it spent on actually drilling for oil.

Miller spent $14.5 million last year on overhead, its new 10K filing shows, compared to just $9.7 million on drilling activities during that same period. The company recorded $5.16 million in stock-based compensation alone – a total that excludes the generous cash payments showered on its top executive – with that cost, totaling 12 cents a share, basically accounting for the entire net loss (also 12 cents a share) suffered by the company last year.

As CEO of the company, records show, Boruff received a compensation package valued at $2.1 million all by himself. He scored $1.425 million of that in cash – a sum approaching all of the unrestricted cash listed on the company’s most recent balance sheet – after securing a hefty bonus that more than tripled the cash payout that he would have otherwise received. He also owns more than 4 million shares of Miller stock, records show, a 10% stake in the company that’s still worth roughly $13.5 million even after the recent collapse.

Meanwhile, corporate filings show, Miller itself remains a bleeding energy company that poses serious risks for investors still willing to gamble on its volatileand rapidly sinking – shares. Those threats, as outlined by Miller itself in its recent annual report, include the following:

*  “We have a history of operating losses; we incurred a net loss in fiscal 2011 and our net income in fiscal 2010 was the result of one-time acquisition gains. Our revenues are not currently sufficient to fund our operating expenses and there are no assurances we will develop profitable operations.”

*  “Approximately 75% of our total estimated proved reserves at April 30, 2011 were proved undeveloped reserves … The reserve data included in the reserve engineer reports assumes that substantial capital expenditures are required to develop such reserves.”

*  “We will be subject to new debt costs under the terms of our Credit Facility … In January 2012, we will be required to devote 90% of our consolidated monthly net revenues toward paying back outstanding amounts.”

*  “A large portion of our outstanding common shares are ‘restricted securities,’ and we have outstanding options, warrants and purchase rights to purchase approximately 35% of our currently outstanding stock … In the event of the exercise of the warrants and options, the number of (shares) of our outstanding stock will increase by approximately 34%, which will have a dilutive effect on our existing shareholders.”

*  “Our management concluded that the internal control over financial reporting was not effective at April 30, 2011 as a result of material weaknesses in our internal control over financial reporting. These material weaknesses in internal controls have led to the restatement of our financial statements for the quarterly periods ended July 30, 2010, October 31, 2010 and January 31, 2011 … Due to the nature of these material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur and would not be prevented or detected.”

* “The restatement of our historical financial statements has already consumed, and may continue to consume, a significant amount of our time and resources and may have a material adverse effect on our business and stock price … Many companies that have been required to restate their historical financial results have experienced a decline in stock price and stockholder lawsuits related hereto.”

By now, Miller has already begun to weather that damaging fallout. With its hammered stock sinking even lower on this week’s chaotic developments, Miller found itself targeted by two class-action law firms seeking to file complaints on behalf of shareholders who purchased the company’s stock ahead of its rapid-fire plunge. The second law firm specifically cited the detailed investigative report prepared by TheStreetSweeper as evidence that Miller had engaged in possible securities fraud. (Notably, despite statements by that law firm suggesting otherwise, TheStreetSweeper itself never reported that the company had violated securities laws.) Miller’s stock, while clearly hit on the day of that big report, has actually lost more ground – hurt by the actions of the company itself – in the volatile trading sessions that followed after TheStreetSweeper first sounded its cautionary alarm

* Important Disclosure: TheStreetSweeper currently holds no financial position in the stock of Miller Energy Resources. As previously disclosed, TheStreetSweeper established a short position in the stock before publishing its original investigative report on the company. However, it has already covered that entire position and has executed no additional trades in the securities since that time. 

As a matter of policy, TheStreetSweeper prohibits members of its editorial staff from taking financial positions in the companies they cover. To contact Melissa Davis, the editor of this website and the author of this story, please send an email to


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