The Hated Spark Eneregy

It isn’t much of a stretch to call Spark Energy (NASDAQ:SPKE) a hated security to hold right now (both the common and the preferred).  Of course I hate it more because I have an overweight position in the shares and after a small purchase on Wednesday I am down about 90 cents per share (factoring in 1 dividend received thus far).  Below is a chart of the common shares which are trading down from a high near $27 1 year ago.



Of course the preferred and common shares are not really ‘hated’.  With a damned lousy 1st quarter being reported on 5/9/2018 investors appear to have simply ‘reassigned’ the current level of pricing ($22.50-$23) to the shares and are saying ‘prove your worth’.  This is what the markets are all about.

The preferred shares which carry a coupon of 8.75% and are floating rate starting in 2022 (NASDAQ:SPKEP) are shown in the chart below.  The company originally had 1.4 million of these shares outstanding before ‘reopening’ the issue in January and selling 2 million more shares.  These preferred shares had been trading over $27 early in 2018.



So let us look at a bit of history from the last 3 years (they were formed in 1999).

Starting in 2015 Spark  generated $358 million in sales with net income of $26 million and they had depreciation of $25 million leaving free cash of $51 million.  In 2016 they had $547 million in revenue with $66 million in net income and $33 million in depreciation for total free cash of $99 million.  In the year just ended they had sales of $798 million, net income of $76 million and depreciation of $42 million for a total of $118 million in free cash.

The rising sales noted above was virtually all from acquisitions–companies that retail energy have a substantial ‘churn’ of customers and as such they are always on the hunt to ‘buy’ new customers.

The company announced revenue for the  1st quarter ending 3/31/2018 with a blowout number of $287 million which unfortunately was primarily caused by extreme cold in the companies service areas.  A retailer of energy has to buy power from the generating utility prior to adding their own margin to the sale price.  In the case of Spark they hedge potential pops in energy prices when they can be reasonably forecast.  Unfortunately for Spark they were unable to forecast the long period of frigid temps and because of this the company took a rather large hit to earnings as they were unable to pass along the cost of power to the end user.

For the quarter ending 3/31/2018 on $287 million in revenue the company lost $41 million, but had depreciation of $13 million so they had negative cash flow of $28 million.  This is meaningful for a company like Spark, but IF it is a one time event it really isn’t critical.

So what does the company have to say about the future. Below is a clip from the CEO’s statement from the earnings announcement.

So the company is expecting some big things throughout the balance of 2018.  We say ‘prove it’–and investors as a whole are saying the same.

Of course SPKE is somewhat of a strange duck in terms of ownership of shares and it is not helpful that 1 person controls 2/3rds of the shares and is paid a huge chunk of money every quarter and year in the form of a distribution.  The common shares of the company are now paying a dividend of .18125/share quarterly for a current yield of 7.2%.  Anytime that a single owner controls every move the company makes investors will be skeptical of the game plan when things don’t go right.

In addition to the ownership issue the company is ripe for lawsuits–all retail energy companies employ all kinds of methods to find new customers–many times employing outsiders to solicit potential customers.  This is likely simply a ‘cost of doing business’.  If one reviews the companies annual reports you will find bunches of lawsuits in process.  Our own research shows that while SPKE has plenty of lawsuits and no doubt plenty of unhappy customers, they are probably no worse than the other energy retailers in the market.

So what is an investor to do?  We don’t ever make recommendations, but we can convey our plan.

We have written that we have an overweight position in the SKPEP preferred shares and currently stand with a modest loss of around 90 cents/share when factoring in the 1 dividend we have received this far.

The preferred shares will go ex-dividend on 6/29/2018 meaning another dividend of about 55 cents.  The common and preferred dividends for the 2nd quarter have already been announced.

2nd quarter earnings should be announced sometime around 8/6/2018.  We anticipate that based upon statements from the company that earnings will be reasonably ‘normal’ meaning equal to the year ago quarter in which they generated $34 million in cash flow.

With the above information we expect that we will determine that the investment is worth continuing to hold.  We would expect that if the earnings return to ‘normalized’ levels the common and preferred shares should move somewhat higher.  If shares  move higher we will let some shares go–sell some, just to get to a normalized position size.

So with that we are going to give management approximately 10 weeks to ‘prove it’.  Prove to us we should hold the shares.

32 thoughts on “The Hated Spark Eneregy”

  1. Tim, see what you have to deal with when you own a “fake utility”. Buy something more stable and conservative…Like I did today…DM… What a horrible chart…And you think that fake utility has dropped…DM is down over 50% the past year. I tip toed back in at 13.75 for a modest 500 shares… I bought at $15 and sold at $15.05after dealing with a heart burn rollar coaster for a week and swore it off…Swearing did me no good as I am back in. Now if D will just throw in the towel,and roll it back up at $20, all will be good, lol…

    1. Hey Grid–SPKE is the only perpetual I own – got to have some excitement in my life. I pretty much stay away from energy MLPs–bad history there.

      1. in light of what is happening to ENB folks in their roll up, I too would stay away from owning single issues in the mlp space. who knows what price you get in a roll up!

        if we get a hotter than normal summer, wouldn’t that also potentially hurt SPKEs cash flow or are they hedged for an outsized event? Bea

        1. Hi Bea–we don’t know the detail on the hedge, but I think a hotter than normal summer is probably easier to forecast and hedge than the crazy cold snap we had last winter (that is a purely anecdotal comment)—or maybe that is just my wishful thinking.

          1. thanx Tim.. oh the weather.. Aug temps in May here in SW PA for the next week, 85-88..

            ((folks)) on a few unrelated notes, Gasoline is up to 3.19 here ( our roads are awful, the high tax goes into the black hole and not black tar!! PA has the worst roads in the country bar none although they have made progress on bridges ) ..

            and as for SPKEp I was going to nibble but of course I am w Fidelity and it is hoops and jumps to trade- which I complained about.. restricted as you and others have noted.. but I can call their fixed income dept for an assisted trade.. was on hold 15min hung up… also I wanted to buy a little of a CA stock (Alaris) and it is not on the DTCC list so it costs $50 to trade in and out.. I have run into this before. Seriously thinking of getting out of Fidelity… or maybe I just need to stick to more mainstream issues…I have been with them forever, hate to go thru the switchies on taxable and roth/trad IRAS… done complaining now…Bea

        2. Yes Bea we had 90 yesterday and looking for the same today and tomorrow.

          Our roads are terrible–they will not raise the gas tax–repubs control the house and senate and we have a dem as governor–never agree and haven’t raised any cash for roads for years and years.

          Fido–yes always a problem. Fortunately we have a 50/50 split between fido and etrade so I go where ever I have to get an execution–I also should leave fido but I guess I am not motivated as we simply have different holdings in one versus the other.

          Have a good holiday weekend.

        3. Bea, I am not enthused about this purchase. D did issue it out at $30. So I will be pleased being rolled up at half that amount, lol.

          1. Don’t look for that rollup anytime soon, Grid. D is still in the midst of trying to acquire SCG, which buries them in debt and so forth. We’ve discussed this, but keep in mind that you’ll be hit with potential major tax issues on the conversion to a C corp if they do roll it up. Remember the guy on SA I told you about who had the 6 figure ‘issue’ when KMP/KMR got rolled up into KMI?

            And then KMI cut the divvy 60% or so and the shares fell well over 50% and still are on their butt.

      2. Well, Tim, I am determined to create some memories with MLPs, myself…And probably will be bad memories too.

        1. I agree Grant. There is no tax issue until 2020, so D will have no interest in doing anything until then. And the tax issue is far from certain and things could change there also. I just have a small sub 10k position here. My real goal is just buying low and while its trashed. This thing is volatile. If it bounced a couple bucks, I would likely be gone by then anyways. Very few issues I ever own are held long term. Many are bought over and over though, lol. I got maybe a bit less than 20 holdings and now that my CTWSO has been called, FIISO is probably the only issue that has been untouched since purchase that is over a year old. So I suspect I will be long gone either way before roll up time if it were to ever occur.

      3. Tim, speaking of adding excitement. Have you ever considered/dismissed owning any of the BRG-A shares? It obviously cant hold MAA’s jockstrap in terms of relative quality balance sheet wise. But the terms of this preferred (and BRG-C) are just so compelling. I have owned C in the past and flipped for some profits before it tanked somewhat. But I got back in on A yesterday for 400 shares.

        1. I like the forced asset coverage ratio, and the step up in dividends if it is not redeemed in 2020 for the BRG-A. As for the books, they don’t look pretty. Is revenues increasing? yes, but debt is piling up, and at the end of the day, i don’t think they are covering their dividends at all. Their expenses continue to be higher than their revenue that is generated, so long term, this continues to not look great at all and I don’t see anything positive there.

  2. Tim, thanks for the research and write-up on SPKE. I’m underwater and holding too. Let’s hope for a good second quarter.

    1. Thanks Leonard–I see we are getting a nice pop today–could be gone in a flash but feels good right now.

      1. 10yr seems to be “crashing”.. I noticed 1-3mo LIBOR rates have leveled off and have fallen a little. I guess EU and EM scares are starting up again.

        1. Hi Bea,

          I just moved some retirement money from Fidelity to BofA/ML because I got tired of bumping up against the Fido ‘restricted’ list and have been pleased so far. Free trades if you qualify, check it out. https://www.merrilledge.com/

          1. Thank you Citadel.. I will check that out… yes there are many options aren’t there.. from the chatter on this and other sites, Ms Amanda J/ FIDO better get with the program over there. The restricted list and the DTCC required clearing/ or $50 extra fee they charge on Canadian issues is starting to bug me more.

  3. Tim: Thank you for your expert analysis. I have 400 shares of Spark as well as 400 shares of Just Energy. Thanks again for yhe great job that you do.

    1. Thanks Jim–looks like you have plenty of the ‘fake utilities’–as Gridbird calls them. Best of luck to you.

      Tim

  4. Thank you Tim for you discussion on SPKEP.
    Hold a long position on SPKEP at Schwab because Fidelity did not allow online trading of this issue. At least for now, it appears that SPKEP has recovered to some extent after yesterday’s swoon.
    On an unrelated matter, considering setting up a rollover-IRA account either at ML or IB. Is either of these two houses as picky as Fidelity in handling small issues? Could any one please share their experience with ML or IB. Perhaps worth a few brownie points that ML is offering 100 free trades a month under certain conditions.

    1. I have been very pleased with my Merrill Edge accounts. I have several with them. When I decided to semi-retire I took back control from my financial adviser and moved everything to Edge. Then I noticed Fidelity had better bond selection and pricing and I moved my fixed income stuff there. The two companies make a good mixture. I haven’t found anything I can’t purchase between the two of them — with Merrill being better for preferred stocks.

      Both of them gave me trouble setting up to trade options though. I had to jump through some hoops. The Merrill person kept insisting I could not have started trading when I was seventeen. I think I actually purchased my first fund (Scudder Bond Fund) when I was 16, but apparently there is an age limit now. The Fidelity agent was an older man and knew exactly how things were and helped me a lot, but there was still too much paper flying back and forth.

        1. No problem. If you have a particular stock or note you want me to check and see if Merrill or Fido will trade I would be glad to check for you.

          It really is odd. For instance I was thinking of buying ULBR which is linked to the LIBOR rate since it seems like a no brainer that it will go up given current conditions, but Merrill would not let me while Fido is happy to oblige. Conversely Fido gives me trouble on preferred issues sometimes while Merrill never seems to have a problem with those.

          BTW, if anyone has thoughts on ULBR I would interested to hear them since I haven’t pulled the trigger yet.

          1. Thank you Scott for sharing your experience with ML.
            As it relates to ULBR, just my two cents…This long 3-month LIBOR index tracker ETN is quite complex, volatile, and a rather pricey instrument. Essentially, it tracks the average of the forward rates and not the current one. As it is derived from a ladder of Eurodollar futures, it is exposed to the effects of contango which can reduce long-term returns. Moreover, as a leveraged product, it’ll experience path-dependency effects.
            IMHO the ULBR product is more suited as a short-term interest-rate play by financial mavens rather than a hedging tool for the average bear.

    2. I’ve been with ML for about 4 or 5 years now. Absolutely love them and have saved thousands with the free trades and happily took the bonus money to boot after moving multiple accounts over to them from various places. They literally do most everything for you regarding the moves – paperwork, etc.

      They don’t nickle and dime me and never have. Went thru 3 other brokerages before settling with them. As far as ‘restricted issues’, never had a problem with that. Anything I’ve ever wanted to trade, I was able to and I didn’t have to call anyone to do it.

      1. I looked at ML to reduce trading costs and snag free money, but their closest bank is another town 20 miles away. I am too old school and need my bank nearby. I have just about accepted I have to stick where I am…I have some very old illiquid preferred issues that they may balk at accepting or not ever allow them to be traded. Another online friend moved to I believe Schwab and they were at first going to refuse the illiquids…Then they relented but said he would be unable to trade them..It about took a fist fight and a month of aurging with the suits before they relented and allowed trading….Which I find considerably dumb…They didnt want to accept them, or then trade them….But you could always buy them from their brokerage. Very hypocritical.

  5. Regarding SPKEP, I feel like they are going to get slapped with a hot summer and spiking supplier costs. Fuels are up across the board it seems and that’s going to cost them as the suppliers will pass on to them what they can’t to their regulated customers.

    Personally, I’m looking to bail after I see the next earnings report – if it’s even just borderline. This thing has just traded horribly, save the past few days, which is all about the 10yr dropping out again more than anything SPKE is doing better.

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