Oil stocks have been all the rage this year, as the ongoing geopolitical tensions involving Russia, one of the largest oil and gas exporters, have sent crude prices close to record highs. Energy stocks like Chevron, BP, Valero, and ConocoPhillips have surged this year between 11% and 45%.
In fact, energy is one of the two sectors of the S&P 500 in the green these weeks, up almost 40% year-to-date. The other nine sectors are all flashing red, with the index itself down 5.4% in 2022, as investors are concerned about the Fed’s hawkish approach to stop inflation.
However, not only blue chips benefit from the energy rally. Anything related to oil, including OTC stocks, is outperforming the market. Energy stocks have replaced tech stocks previously lifted by the lockdowns during the pandemic. We have already reported on Abraxas Petroleum Corporation (OTCQX: AXAS), FEC Resources Inc (OTCPK: FECOF), and 88 Energy Limited (OTCQB: EEENF), which are great oil plays.
Today, we’re about to discuss a lesser-known oil stock traded on the OTC markets. We think it has some great potential and it can now be purchased at a very low price. Houston Natural Resources Corp is a Pink Current stock that has been declining for months, but it may come back even stronger, and there are many fundamentals suggesting that this is indeed what’s going to happen.
What Is HNRC All About?
HNRC is an $18 million holding company with business operations and investments. While we can consider it an oil play, it has had a diversified business, focusing on the development of natural resources with state-of-the-art innovative technologies in tandem with oil field waste disposal and recycling that are environmentally safe and socially responsible.
The Houston-based company engages in the recycling and remediation of oil-produced contaminates. It provides oil field wastewater treatment and disposal services through a reclamation plant located in south Texas.
HNRC also owns approximately 2,800 acres of oil and gas leases located in the Halff Oil Field in Crockett County, Texas, with proven and appraised reserves of $69 million and 83 oil wells to be reworked.
Since going public on OTC markets at the beginning of last year, HNRC has continually declined, bottoming out on March 1 at $0.30. In January 2021, you could see HNRC trading above $3.5. Since the recent record low, the stock has bounced back to trade at $.60 as of March 24. More importantly, the rebound is supported by record volume figures.
HNRC’s subsidiary, Houston Natural Resources, Inc (HNRI) has completed two years of its audited statements and detailed independent appraisals of the assets. HNRI has been thinking about raising capital through a Regulation A filing or S-1 Registration that would provide for a separate listing on a major exchange, which happened last month.
In December 2020, HNRI formed HNRAC Sponsors LLC (HNRAC). Eventually, HNRAC formed HNR Acquisition Corp (HNRA) – a Special Purpose Acquisition Corporation (SPAC). In January last year, the SPAC filed an S-1 Registration for $100 million and listing on the New York Stock Exchange (NYSE).
Last month, HNRA closed its IPO listing on the NYSE with aggregate proceeds of $86.2 million, including the underwriters exercising their option. HNRA’s IPO of $75 million consists of 7.5 million shares at $10.00 per unit on the NYSE American and trades under the ticker symbol HNRAU.
According to the HNRA registration statement, HNRAC Sponsors, LLC owns 359,375 HNRA common shares. HNRA is a newly organized blank check company formed for the purpose of conducting a merger, acquisition or similar business combination. It plans to focus on assets used in exploring, developing, producing, transporting, storing, gathering, processing, fractionating, refining, distributing, or marketing of natural gas, natural gas liquids, crude oil, or refined products in North America.
HNRC Reports Solid Financials, Announces Dividends
In January of this year, HNRC provided an update, saying that it was ready to start the rework of its 83 wells this quarter, in addition to increasing the capacity from the newly installed saltwater disposal equipment. The company expects to have a second facility operational by the end of Q2.
HNRC expects to achieve significant results through a combination of internal growth, acquisitions, and expansion. In addition, the company expects to see an increase in advisory services revenue from its investment portfolio. It is targeting acquisitions in the $10 million to $100 million range to increase its portfolio value.
HNRC plans to become a debt-free company, having to further reduce a debt-to-equity ratio of less than 2%, with current liabilities being at less than $1.3 million. The oil industry has a 40% debt-to-capital threshold. HNRC has been able to use its low debt ratio to acquire equipment and is now well-positioned to make future acquisitions.
The company has reported record earnings in 2021 and expects to continue its expansion in 2022. HNRC released solid financials for the twelve months to December 2021:
- Total revenue was $18.2 million versus $9.5 million in the previous year, up 91%;
- Total earnings were $7.6 million versus almost $3 million in 2020, up 157%;
- Total assets were $74.2 million, an increase of 2%;
- Earnings per share for twelve months was $0.35 versus $0.19, an increase of 84%;
- The company has a net asset value of $3.46 per share as of December 31, 2021.
HNRC President Frank Kristan explained:
“The company sponsored a successful $86 million NYSE listing of an energy-focused special purpose acquisition corporation this month. We anticipate consistent growth from revenue and profit in 2022. The company is evaluating sponsoring other energy-focused special purpose acquisition corporations in addition to water treatment plants, oil and gas, and other water treatment technology acquisitions.”
Earlier this month, HNRC said it would start paying a dividend in the third quarter of this year between July and September. The company should receive a distribution from its investment in HNRA, which now trades on the NYSE. If the company’s current holdings of 359,375 common shares are available for distribution for a dividend at $10 per share, then the value of the distribution in cash or shares would be $3.6 million at $0.17 per share.
HNRC plans to continue sponsoring additional special purpose acquisition corporations, which would provide resources for additional dividends.
HNRC has also become aware of a naked short position in the trading of its stock on the OTC markets. It found out that sometimes as much as 80% of the shares had been shorted in one day. There is an average 57% daily naked short position, which makes it a massive short squeeze candidate.
The JackPot for HNRC Investors: Another SPAC on the Horizon
On March 23, HNRC announced that it had signed a letter of intent for a transaction with oil and gas firm Cunningham Energy LLC. HNRC will form another SPAC with cash and securities for the acquisition of interests in Cunningham Energy with the purpose of acquiring, exploring, and producing oil and gas in the US and Canada. The proposed investment is for up to $100 million in cash and securities and is subject to due diligence and financing. The transaction will close by the end of June. As per the LOI, future development funding for up to $600 million from SPAC and PIPE follow on transactions is also planned.
Cunningham Energy is an independent producer of oil and gas that is currently seeking to get listed on either NASDAQ or NYSE.
The company has entered into a separate agreement to provide advisory services to HNRC that would include the development of the company’s existing 83 wells in the Halff Oil Field in Crockett County, Texas, and additional investment opportunities in the energy industry. The fields have independent valuation of $69 million based on initial valuations of $50 per barrel of oil and $3 per MMBtu of natural gas.
HNRC will also enter into a separate agreement/and or joint ventures with Viper Capital Partners LLC on a deal-by-deal basis for further development of acreage, minerals, and drilling projects in the lower 48 states, including West Virginia and Texas.
The Final Note
The $100 million deal with Cunningham Energy is huge, and we expect the stock price of HNRC to break above the $1 mark soon and eventually make new highs. The $18 million market cap doesn’t reflect the true potential of this massive oil play. The upcoming SPAC related to the Cunningham Energy deal will probably go separately on a major exchange like HNRA did earlier this month and thus won’t be directly related to HNRC’s market cap figure. However, HNRC may hold a greater share in the upcoming SPAC, which will increase its valuation and provide an additional stream for dividends and thus attract more investors.
How many OTC stocks pay dividends?
Even without the Cunningham Energy deal, HNRC is showing great results that should put its stock price above $1 at least.
Also, HNRC is an ideal short squeeze candidate, as 60% of the stock volume is shorted. It seems that some investors don’t understand the true potential of this company, but shorts will eventually pay the price.
As always, good luck to all (except the shorts)!
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Disclosure: We have no position in any of the securities mentioned. We wrote this article ourselves and it expresses our own opinions. We are not receiving compensation for it. We have no business relationship with any company whose stock is mentioned in this article. Insider Financial is not an investment advisor and does not provide investment advice. Always do your own research and make your own investment decisions. This article is not a solicitation or recommendation to buy, sell, or hold securities. This article is meant for informational and educational purposes only and does not provide investment advice.