Monday, November 9, 2009 0 comments ++[ CLICK TO COMMENT ]++

Purchase: Aspen Exploration (OTC: ASPN)

(Important note: Do not blindly buy this stock based on what I did. If you are not a stockholder of record by November 16, you will not be eligible to get the dividend. I'm in Canada and I'm not sure if it's slightly longer but based on my transaction today, it settles on Friday so it is unlikely anyone purchasing tomorrow will be eligible. Usually it takes 3 days but not sure why it was 4 here. In any case, potential return with this deal is quite low and it is somewhat risky so one isn't missing out on much.)

I hope I'm not doing something stupid but I ended up taking a sizeable stake (20% of portfolio) on the Aspen Exploration liquidation play. I hope I'm not doing this because I'm bored or impatient (or due to other matters in my life.) I referenced the original source of the idea, investor MCN1 at Greenbackd, about a month ago but decided to take a position today, at the last minute :( Regular readers interested in special situations will be familiar with the Greenbackd blog so I'm not going to describe the blog. All I'll say is that the proprietor of Greenbackd does exceptionally reliable analysis and you can rely on his analysis (that does not necessarily mean that the outcome matches expectations ;) ).

You may want to read all ASPN-tagged articles at Greenbackd but, as I warned at the top, this deal may not be available after today (depending on how quickly you can become a shareholder of record.) Essentially, this is a quasi-liquidation play. I say 'quasi' because the company has decided to pay out roughly 75% of the assets with a special dividend, while deciding to retain 25% with a decision to be made in the future. Stockholders of record as of November 16 will receive a special dividend of $0.73 (read this post by Greenbackd).

Potential Return

I did look at the latest documents filed with the SEC but I'm not going to do my own liquidation estimate since this is pretty straight-forward. Greenbackd estimates the liquidation value to be around $1.17, with net cash value per share of $1.09. MCN1 estimated a liquidation value of $1.81, with a net cash value of around $1.38. The wildly divergent numbers calls into question the whole analysis but, assuming the latest filed numbers aren't a fraud, I think Greenbackd's numbers are a better—more conservative—estimate.

If we go with the $1.17 estimate, the upside from $0.97 is 20.6%.
If we go with the $1.09 estimate, the upside from $0.97 is 12.3%.

Not A Clean Liquidation

What makes this tricky—and dangerous!—is the fact that the company has announced it will pay out most, but not all, of its assets. It will pay out roughly 75% of the assets in a $0.73 special dividend but hasn't decided what to do with the rest.

The big risk is that the insiders will suck the remaining assets by paying themselves large salaries for doing nothing (say over the next 2 years.) Since this company is tiny, executive salaries can easily drain the remaining assets. This possibility is probably what has kept many away from this situation.

The other problem is that, even if nothing sinister happens, shares of the remaining firm will be highly illiquid. The company is already a tiny, microcap, with a market cap of roughly $7 million. After the dividend is paid out, the company will probably have a market cap around $1.75 million so it will be illiquid. This essentially means that an investor should assume that they can't monetize the remaining portion for a long time.

For foreign investors like me, currency fluctuation is a real risk. A 10% move in the Canadian dollar, which is quite plausible, can wipe out everything. I don't really know what to do about this (it impacts everything.) I have thought of hedging future arbitrage-type investments (by buying a C$ currency ETF or something similar) but am not doing anything with the Aspen investment.

So, all of these factors make this highly speculative. Making a concentrated bet on such a situation can blow up badly but we'll see...

Why Do It?

What I like about this deal is that you will get back most of your investment very quickly (assuming the company doesn't renege on the initial dividend.) Although it's risky, one is only risking around 25% of their original investment.

I am also not sure what the true return on this investment will be. Is it actually 10% to 20% calculated above; or is it more like 70%+? If you subtract out the initial dividend (you get it back almost right away and don't really risk that capital), you are risking around $0.25 while the remaining liquidation value is around $0.44 (these are rough numbers.) Using these numbers will yield a potential return closer to 70%+ (even if it takes 3 years, this would be a good return.) I don't know... I'm not sure if I'm pricing this opportunity properly.

Purchase price: $0.97
Investment time frame: Short to Medium

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