ENER (recent price: $4.30) remains, in my opinion, an interesting investment situation, even if I’ve been losing on this one to date. The company’s financial results are clearly improving and the company bonds have been on a tear. The stock, however, is still stuck at the low 4′s, despite occasional rallies and then declines. The main reason (if there is really any rationality for stock prices), I believe, for the poor performance is the prospect of stock dilution to pay off the convertible debt in 2013. The company has already done several debt-for-equity swaps, and clearly this is a restructuring strategy they may continue to pursue.

But, are debt-for-equity swaps something to be scared of? Not really. It all depends…on the stock price, and on your bankers/lenders, who ultimately control the prices via their support or lack thereof. In the case, of ENER, my best guess is that in a worst case, assuming their bankers don’t try to screw the company (which I doubt, since the company has potential), the company could issue 50 million shares (round numbers here for simplicity) at around $4 a share to pay off all the debt. That leaves the company with 100 million shares, nearly double the current share count. Massive dilution you say? But wait, the debt will now be at ZERO. And the company will have well over $100 million in cash to fund operations instead of paying down debt. All in all, even with 100 million shares, the enterprise value would be only $300 million. The company is expecting over $300 million in sales in 2011, and has strong growth prospects in the years ahead. So is $300 million enterprise value with zero debt and strong growth prospects, all that bad? I say, it’s a good and smart deal.

The positive counterpart to the above scenario is that it’s entirely feasible that the stock price will go up as more investors become aware, or at least trust, in the financial turnaround. In that case, any debt-for-equity swaps would be done a much higher price than $4, implying a much lower share issuance count, which would of course be quite bullish.

All in all, I’m still hopeful for ENER, since I’ve seen these near death spirals before (e.g. VG) and the odds of pulling out of them are very strong, if financial results show continued improvement, if you have some lenders on your side (always the case in these situations, since lenders have an opportunity for hefty fees in these situations) and if the Market is somewhat decent. The next few quarters will be crucial to the ENER story.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ENER. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.