JIM FUGLIE: View From The Prairie — Is A Refinery Really A Good Investment?

I have a friend who is an investment banker. I don’t know much about his business 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 Meridian is and what it has 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 Wednesday 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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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 ballpark 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 website 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 past month, that and all the stupid stuff on the website 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.

2 thoughts on “JIM FUGLIE: View From The Prairie — Is A Refinery Really A Good Investment?”

  • Richard C. Kagan November 18, 2021 at 9:23 am

    Thanks. I want to share your column. Yell loudly across the prairie if this is not okay.
    The lack of oversight in the PPP is frightening. Of course, we should tax the million and billionaires.
    I wish representatives like Truman were back. He held hearing on military waste and corruption.

    Just some thoughts from an old guy who remembers Truman and has correspondence with his office to prove it.

  • John A Burke November 18, 2021 at 10:41 am

    I have worked on a lot of private-placement financings and workouts as an attorney/CPA, and, like your investment banker friend, I know that “new money” always takes care of itself. Why would it not? I would be very surprised if Meridian, in its present state, could obtain a clean “going concern” auditor’s opinion. If the company is in serious trouble, as Meridian certainly appears to be, any new institutional investor would probably insist on changes in management personnel, seat(s) on the board, and would likely put their money in as debt or preferred stock, to be senior to all of the existing equity investors, until some trigger point of operational success, when the debt or preferred stock might convert to equity, certainly at a rate very favorable to the institutional investor and severely watering down the early investors. In addition, the investor would likely negotiate warrants that could be converted to common stock at a later date at a favorable price. The early investors will be left with a choice between losing all of their investment if the “white knight” investor doesn’t come in, or recovering some percentage of their investment if the company can survive through the infusion of new money.
    Frankly, I think the regulatory officials ought to pull the plug on what appears to be a fraudulent operation, whether it was originally intended or not, and their PPP loans and securities sales should be investigated.


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