SXC - SunCoke Energy

[PullTheTrigger]

What's your preference here? SXC or SXCP?

 

I think you mentioned this earlier as you thought SXCP would go to the upper teens. I'll review the thread.

[Picasso]

SXC is much better here in my opinion.  They're been trying to create value at SXCP over SXC (by redirecting some cash flow to delever SXCP) but I feel like the presence of activists at SXC and the fact that SXCP will probably always yield more than 12% will pressure them into consolidating.  Why support an entity and get no credit for it (SXC isn't trading with much of any valued attached to their non SXCP assets) when you can instead consolidate those cash flows.  Even if SXC stays with a high yield, I feel like shareholders of SXC (like Mangrove) would prefer to take the cash instead of having it go through SXCP.  Bond markets are a lot better, SXCP debt is trading a lot better, steel counter parties have cleaned up balance sheets, so maybe they could get it done now.  There would be a change on control triggered, so some kind of consent fee will need to be paid out.  If you think SXCP should trade at $15 and sustain something close to its current dividend, then I get SXC trading somewhere around $11. 

[PullTheTrigger]

Thanks for your opinion!

[RadMan24]

SXC filed a $500 million mixed shelf offering. Perhaps a sign of consolidating SXCP into SXC?

 

Possibly. However, and this may be a crazy suggestion, but we both know that Horsehead is in Ch. 11. Those zinc facilities, at least the recycling ones, maybe even parts of horsehead, do fit very well with Suncoke's business model, and could be a theoretical "third leg" if you will. Coke, coal terminal, zinc recycling - all somewhat tied to the niche markets of steel production.

 

Of course this is complete speculation. But, I would argue making an inorganic + accretive acquisition could pay off handsomely.

 

Thoughts?

[Guest roark33]

The ZINC acquisition might break COBF/Fintwit....and brass manager would probably have a stroke. 

[Picasso]

My understanding is that the Horsehead assets aren't really take-or-pay.  SXC is way more focused on SXCP and buying anything from ZINC would really make investors distrust Fritz, in my opinion.  Plus Mangrove would probably flip their lid when they could just acquire SXCP instead. 

 

I tried pitching SXC on buying into FELP but they didn't really go for it (again, mentioned they were focused on SXCP) so I doubt they would go out and buy anything else.

[Picasso]

Well timed share issuance by US Steel.

 

https://www.ussteel.com/uss/portal/home/newsroom/pressreleases?renderFrame=https://uss.mediaroom.com/index.php?s=32722&item=137095

[sampr01]

Hi Picasso,

 

Any update on mixed shelf offering. Are they diluting commons or issuing debt?. Can they acquire rest of SXCP using SXC commons as currency?.

 

Thanks

[awindenberger]

Interesting to see SXCP up 11% today with SXC only up 3%. Picasso has mentioned the fact that SXC probably has more optionality at this point, and the split is starting to become more interesting. I'm considering switching my position, but on the other hand its fun collecting 10% on my initial investment every quarter in dividends. If only I'd taken a bigger position...

[Picasso]

If you like SXCP ay 14.50, you should love SXC at 6.50.  Maybe you don't have to sell SXCP to buy SXC.  That 40% yield is pretty much all tax deferred too, so unless the contracts start going south it probably pays to hold it.  But it's something where you have to keep one eye open at night and monitor their customers like a hawk.

 

Since the start of the year, we had SXC trade at a negative value to their stake in SXCP.  Then SXC was trading at over double their stake in SXCP.  And recently it almost got back into negative territory.  It's been very profitable to simply trade around that.  I've talked to various SXC/SXCP shareholders and it's clear that they're two entirely different types of investors.  If you look at the last SXC earnings call there wasn't a single question.  Well, there was one.  But it was a guy who thought he was on the SXCP call.  So it doesn't surprise me that it's a bit cheap here.  SXCP would have to drop a lot before this price on SXC was impaired.  And with Murray and Foresight patching everything up, the steel counter parties diluting equity left and right with all their debt trading at par or better, the risk reward looks really nice.

[KJP]

If you think SXCP should trade at $15 and sustain something close to its current dividend, then I get SXC trading somewhere around $11.

 

SXCP is almost there, but, as you mentioned, SXC is lagging.  Mind sharing the math on how you get SXC to $11? 

 

With SXCP at $14.50, SXC's LP units and its IDRs at a 10 multiple roughly equal its current market cap (~6.67/share).  So, to get to $11 you need another $250 million or so of value for SXC's other assets.  If Jewell and Brazil roughly cancel out corporate, that leaves you with Indiana Harbor, which is a problem they can't seem to solve.  If they can get it to $30 million EBITDA, I can see how that gets you most of the way to $250 million.

 

 

 

 

[Picasso]

If you think SXCP should trade at $15 and sustain something close to its current dividend, then I get SXC trading somewhere around $11.

 

SXCP is almost there, but, as you mentioned, SXC is lagging.  Mind sharing the math on how you get SXC to $11? 

 

With SXCP at $14.50, SXC's LP units and its IDRs at a 10 multiple roughly equal its current market cap (~6.67/share).  So, to get to $11 you need another $250 million or so of value for SXC's other assets.  If Jewell and Brazil roughly cancel out corporate, that leaves you with Indiana Harbor, which is a problem they can't seem to solve.  If they can get it to $30 million EBITDA, I can see how that gets you most of the way to $250 million.

 

I don't think Jewell and Brazil are worth as much sitting under SXC as they are under SXCP.  Unlike some other MLP's that had lost 80% of their value, SXCP has kept the distribution intact while reducing debt.  So if SXCP is trading closer and closer to levels that would allow a dropdown ($15 is pretty close, I think we need over $20) then SXC can bring in significant cash by selling them down to SXCP.  And if it simultaneously increases the distribution at SXCP, SXC's stake becomes more valuable as well.  Plus their IDR's.

 

The remaining drop downs from SXC are from a really strong counter party, ArcelorMittal.  I feel like SXCP would respond well to further diversity among the counter party risk since it's almost entirely AKS and X.  And diversify away from that coal terminal everyone hates.

 

When SXCP was trading around $22, Fritz made these comments:

 

I'll make a point here. We have estimated what the proceeds would be from executing our dropdown transaction, a reasonable set assumption, and that resulted in a $350 million to $400 million of cash that would be generated at the parent after paying down debt and after paying the appropriate taxes

 

To be safe I'd argue you should chop that number in half.  Add in the cash owed from the cost holiday, most recent SXCP distribution, and I think you get close to $11.  Part of that assumption is Indiana Harbor gets back to just $15 million of EBITDA.

 

There is something else which is difficult to quantify.  If they can't complete any other dropdowns (even SXCP debt is back at $91, the closer those trade at par then I think it's game on for selling down Jewell and Brazil) and SXCP keeps trading like crap then they'll probably collapse the MLP structure.  Why support a 15-20% yield if you get nothing from it?  It's either be in a position to sell Jewell/Brazil/Indiana Harbor or don't have the MLP at all.  When SXCP was at $6, it made sense to just do a simple SOTP (including looking at free cash flow of these stranded assets under SXC instead of SXCP) because there seemed like a very small probability of any dropdown in the near future.  But with SXCP at $15 and the debt within earshot of par, I really think you should assign some value to growing distributions at SXCP and what that would mean for the SXCP unit price plus the IDR's.  Only because the probability of this has gone up tremendously.

[KJP]

 

When SXCP was at $6, it made sense to just do a simple SOTP (including looking at free cash flow of these stranded assets under SXC instead of SXCP) because there seemed like a very small probability of any dropdown in the near future.  But with SXCP at $15 and the debt within earshot of par, I really think you should assign some value to growing distributions at SXCP and what that would mean for the SXCP unit price plus the IDR's.  Only because the probability of this has gone up tremendously.

 

Thanks for clarifying.  I agree that the upside from here likely has to come from getting the old MLP machine going again or collapsing the structure.  In the mean time, trying to figure out SXC standalone FCF is a bit tricky, given the unclear timing and extent of Indiana Harbor CapEx and the various moving parts.  Are you getting around $60 million of FCF for standalone SXC as things stand now?

 

Regarding collapsing the MLP, would SXC need to pay a change-of-control premium to SXCP bondholders?  SXC already owns a majority of SXCP units.  If SXC structures the transaction as simply a purchase of the remaining SXCP units (which they could start to do anytime) and turns the MLP into a wholly owned sub, would there be a change of control?  [This wouldn't work if they want to eliminate the MLP entity altogether.]

[Picasso]

I also have about $60 million of FCF. 

 

As a side note, I took a weighted average of the credit yields on SXCP counter parties.  It's about 12% and heavily skewed by the 40% yields that Murray notes have.  The coal export terminal is actually the least of my worries when it comes to SXCP customer risk.  At some point the market should realize that with Murray/Foresight but even at current prices a 12% yield on SXCP DCF would put it back at $22.  There is always that risk that steel gets worse as the coal export customers get better, but for the time being I think the yield on SXCP is way too high.

 

They would definitely need to pay a big premium to collapse the MLP structure.  An early call would be $106 here.  Goes down to $104 next year and then $102 the following year, then they mature.  Which is why I think market par value is important on SXCP debt if they want to buy more assets from SXC or collapse the structure.  Or even refi the debt in 2019.  But I've played with a lot of various outcomes on collapsing the structure and it doesn't look that great.  The costs would probably eat up a year of consolidated FCF.  It would seem to make more sense to just give this another year and see if the MLP discount narrows.  There's a good chance it will.

 

As far as SXC buying up SXCP units, I think the more efficient method would be to let SXC and SXCP repurchase their own respective shares/units.  Now that Foresight/Murray have been resolved it would appear that SXC should make that a focus.  It would have a better impact than outright purchases of SXCP in the open market (they're getting either a low implied SXCP price or non-SXCP assets for "free")?  Also cleaner tax wise. 

 

Diversifying the credit risk in SXCP would go a long way.  If they could just get in a position to sell down Jewell and Brazil, it would accomplish a lot...

[valcont]

OhOh  the price is shooting up. Either Picasso is moving the market or the day traders have moved on from FELP to here :)

 

There may be some value here but  hard to put the number/timing on it. IMO market is correctly valuing them as a tracker for SXCP. Indiana Harbour sounds just like a Horsehead situation. There are roaches there. If you hear their last conf call , the mgmt tried hard to put the lipstick on that pig.

 

Plus don't forget the general sentiment towards MLPs. There is a lot of blood on the street in the oil, dry bulk and even real estate MLPs and I don't think they'll be bid up in an expected higher interest rate environment like they were few years ago.

[sampr01]

 

Coking #coal futures have nearly doubled since July

 

 

[Picasso]

AKS has been diluting the crap out of their shareholders, including another offering last night.  Every one of their bonds is over par.  Quite a difference from the start of the year.

[KJP]

SunCoke has made an offer to buyout all SXCP units for 1.65 SXC shares per SXCP unit.

[Picasso]

awindenberger,

 

Any thoughts on holding the SXC shares you'll get post merger with SXCP?  I'm not a big fan of management or all these new ventures they might get into.  Dividend yield at SXC will be about 2% post merger which I'm guessing SXCP unitholders will dislike and sell into.  I'm also guessing SXC will look a lot different in a few years and I'm not willing to roll the dice on managements ability to handle that.  Their CMT purchase almost killed the company.

 

There's probably a bit more juice in the shares with the API 2 tailwind, but I think it makes sense to move on once shares/units go into long-term capital gains.

[awindenberger]

awindenberger,

 

Any thoughts on holding the SXC shares you'll get post merger with SXCP?  I'm not a big fan of management or all these new ventures they might get into.  Dividend yield at SXC will be about 2% post merger which I'm guessing SXCP unitholders will dislike and sell into.  I'm also guessing SXC will look a lot different in a few years and I'm not willing to roll the dice on managements ability to handle that.  Their CMT purchase almost killed the company.

 

There's probably a bit more juice in the shares with the API 2 tailwind, but I think it makes sense to move on once shares/units go into long-term capital gains.

 

I must say the new projected dividend yield is not attractive. I wonder why they are setting it so low. At those levels its only $25M/annually, when they were paying out $110M or so at SXCP.

 

It was interesting reading the M&A Call transcript.Its pretty unusual to see multiple analysts speak out against a deal as strongly on this type of call.

 

It would have been nice if Andrew Midler had let Fritz finish explaining the thought process instead of interrupting him multiple times.

 

At this point I think I will sell my shares in January once I reach one year. It seems like we might not even see additional dividends after the Q3 one.

 

Any chance the conflicts committee decides the premium is not strong enough?

 

BTW, this reminds me of the WNR-NTI buyout from last year. WNR owned 60% of NTI and made an offer that NTI shareholders thought was too low, but a good portion of it was cash. When refining crack spreads fell in late 2015, suddenly NTI shareholders were insulated from the decline because they were going to get $15/share no matter what.

 

I happened to sell my NTI when the deal was announced in the mid-$20s. I was annoyed at first, but then WNR went from the high $30s to as low as $18/share, which turned out to be a great entry.

 

This could happen here too with SXC if we see a sell-off initially.

[Picasso]

And since it's an MLP, the stock exchange is actually a taxable transaction.  I doubt they raise the offer for SXCP in the form of more SXC shares.

 

I agree, there will probably be an opportunity after the merger is done.  But for all intents and purposes this trade is basically done.

[Grox]

Anyone still following?

 

Surprised that the conflicts committee stuck up for SXCP shareholders (deal never made sense for them, IMO).

 

SXC today trading at its net cash + SXCP holdings (so no value for IH, Jewell, Brazil).  Lots of carry cost, though, putting on a long SXC / short SXCP trade.  And this may be the right relative valuation, given the uncertainty of IH ...

 

[given2invest]

Anyone still own SXC or SXCP?

 

I think good chance we see another merger announcement on Tuesday.  Can look at the comments in this thread to see why...near the bottom

 

https://seekingalpha.com/news/3426688-suncoke-energy-partners-declares-0_40-dividend

 

 

[given2invest]

btw i nailed this...they consolidated SXC/SXCP on tuesday.  i think SXCP is super interesting here as "new SXC" is very cheap.  will write more about it tomorrow.