Is A Refinery Really A Good Investment?

I have a friend who is familiar with the investment banking world. I don’t know much about it because I don’t have much to invest. But he’s been keeping track of the articles I’ve written about Meridian Energy Group, the company that wants to build a refinery next to Theodore Roosevelt National Park.

From time to time he sends me a letter with his thoughts on the company and its antics. He’s apparently taken a pretty close look at documents dealing with Meridian’s finances and stock offerings. He seems pretty familiar with what they are, and have been, doing. Maybe he was thinking about investing himself. But I’m guessing, based on what he’s written to me lately, he got rid of that idea in a hurry.

I got a letter yesterday that I thought I might share with you. It’s pretty complicated for an English major like me, but some of you readers with a little more mathematics and business knowledge might be able to enjoy his insights. Here’s what he wrote this week.

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Jim,

I think you are on to something with the PPP loan investigation.  They got the $853M loan in April, yet they didn’t pay any of the employees that sued them over the $600M with any of it.  I too am rather skeptical of their claims of 39 and 41 employees.  What are all these people paid to do after all, in a company that doesn’t actually make or sell anything?

When I did the calculations and application for my wife’s business (we only applied for $11,000) we didn’t have to produce verification and evidence of our payroll, only fill out the forms that SAID we had those sorts of expenses. Pretty much the same thing when it came to the forgiveness documents. With a program that was put together as fast as that one was, and as widespread as it was, you have to KNOW there was a fair amount of fraud that happened throughout the country. Your recent articles I think just uncovered the tip of the iceberg (not just Meridian, but a BUNCH of them).

One other thing that the development equity people that are coming into this deal (the money up until now) ought to be mindful of potentially happening:

With a deal that is going to cost $1B (in debt and project equity) Meridian has previously promised that the Development Equity people are going to own 25% of not just this, but of ALL Meridian projects into the future. That means their $40MM would be worth 6x their investment, or $250MM. Well there is NO WAY an institutional investor is going to allow that (and their investment is only worth 75% of what they put in). Likely, the investing institution will insist the development equity will be worth the same or only slightly more than their money that is now coming into the deal relatively late.  

The way to get there is simple:

The investing institution (contributing the project capital) is going to insist that they ALSO be issued development equity stock (at some very, very, low price), thus diluting the existing shareholders down to a number commensurate with the actual cash that has gone into the project. That’s the permitting, engineering, and actual construction work. By my reckoning that’s probably in the ball park of <$5MM, less any amounts that haven’t yet been paid (like to SEH and McDermott). Meridian won’t be in any position to bargain either. I’ve seen it happen before. (The Cirrus Aircraft company headquartered in Duluth MN when the Bahranians came in to bail them out.) Early stockholders buying stock all the way up to $10/share get a rude lesson when the big money comes in at $2/share, AND they will probably insist that senior management surrender a bunch of their personal holdings, most of which they actually paid nothing for anyway. That’s exactly how the Cirrus deal went down.

Of course, Meridian, in their disclosure documents, does warn potential investors that future capital raises would be dilutive to existing shareholders, but I doubt people are generally aware of how much their stock is going to be watered down–IF–and it’s a big IF –this deal ever gets funded. Big institutional money doesn’t get to BE big institutional money by being dumb money.

That speaks to the investment merits of the deal. I doubt that even Meridian management is aware that this kind of a wrecking ball is coming (after all none of them have ever done a deal like this before), but coming it is.

Keep up the good work. I think you WILL eventually see this deal implode. The fact that they haven’t bothered to change their addresses on the web site tells me that there really isn’t anything concrete going on yet. If Morgan Stanley were REALLY working on this deal for real for the last month, that and all the stupid stuff on the web site would have been cleaned up by now. And yes, in due diligence the investing institution WILL go through the books on the PPP loans. Your articles have seen to that little item happening.

All the best, 

Your Friend

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Well. I think what I’ll do next is send this on to Morgan Stanley. Just in case they really are considering putting a billion dollars into a refinery next door to Theodore Roosevelt National Park. I really don’t want them to do that.