This is a brief short-sale write-up based on what I believe is a misunderstanding of the correct share count after a large investment and 1:3 reverse stock-split.  The Chairman just went on CNBC this morning to pump the stock to the retail crowd, which makes it especially timely as well.

Ram Energy Resources recently received a $550M investment from Halcon Resources, an investment vehicle run by the former CEO of Petrohawk, Floyd Wilson.  Post this investment, it renamed to Halcon Resources.  I believe that analysts and the investor community are incorrectly factoring in the dilution from the investment, and this has lead to a gross overvaluation of the stock.   The confusion surrounding the investment is compounded by the fact that the company did a reverse 1:3 stock split in conjunction with the investment.

I am not going to focus on the assets here, as that is not the crux of the short thesis.  Analysts covering the stock previously estimated the NAV to be somewhere around $500M.  Comps typically trade at a 50% discount or premium to NAV.  Prior to the investment by Halcon Resources the stock traded with a TEV of about $300M. 

My share count math is below.  All of the numbers below are post the split:

1. Prior to the investment, the Company had 26.3M shares. 
2. As a part of the $550M investment, Halcon received:
   1. 73.3M common shares
   2. 110M warrants struck at $4.50.  At the current price this equates to 22.9M shares
   3. $275M convertible debt instrument struck at $4.50.  This converts to 61.1M shares at the current price
3. This sums to 183.6M fully diluted shares.  The math could differ slightly depending on how warrants are calculated.

This equates to a current market cap of $2.35B and the Enterprise value pro forma for the new cash and assuming the convertible becomes common equity is $2B.

Thus the market is valuing the company 5x higher as a result of the recent investment, and 3x+ higher than NAV.

I believe that there are a couple reasons why this sky-high valuation exists.

1. There is confusion amongst some of the analyst community, and the retail community as to the correct share count and dilution.   Until Friday afternoon, Bloomberg was not even including the new common shares.  A sellside firm issued a report this morning with a $15 price target that assumes that the convertible note is debt despite the share price being 200% above the strike.  This math understates the current market value of the company by about 30%.  They also used extremely aggressive NAV assumptions that include many things that are on-the-come, essentially assigning a very high premium for the new CEO.  Despite these very aggressive assumptions, their NAV comes in at just $10 to $11 per share when properly calculating the convertible debt dilution.
2. Investors are excited to have Floyd Wilson, who was the former CEO of Petrohawk which was sold to BHP for $15B , involved in the Company.  Using the same ticker as the old Petrohawk has helped to attract some of this attention. It is hard for us to fathom how a ~$1.5B premium on ~$500M of assets could be justified.

Halcon’s initial $550M investment which just closed last week is now worth on paper approximately $2B.  Not a bad trade if the market remains seemingly irrational, but I believe it will correct as investors catch on to the correct share count.  I would expect other shareholders who have seen the value of their holdings triple in the last few months will look to sell soon now that the deal has closed.