FELP - Foresight Energy

[Picasso]

Okay one more comment.  Sorry for all the verbal diarrhea, I'm just rehashing out the price action today/likely outcomes after what should have been super good news.  But yet the response was so muted.  Trying to kill this idea now...

 

I honestly don't think investors know what the hell is going on with FELP.  If you look under Yahoo Finance, or Seeking Alpha, or Bloomberg (non-subscription, just the site) there's literally nothing.  You have to go digging through this 8-K and realize it's the transaction support agreement which met the deadline for the other lender agreement.  Plus all the dilution mumbo jumbo, no press releases from Foresight, just lots of confusion.  I'm sure a lot of investors still think it's heading into bankruptcy.  Is there anyone else on the web doing a play-by-play on this situation?  It just seems so abandoned.  Plus the float is tiny.

 

But let's just say it's not just a stock with market abandonment issues, but instead it gets diluted up the wazoo.  Then maybe it simply takes them another year to repurchase a bunch of these new warrants and common units to get back to square one.  I'd have assumed their business would have turned the corner by then and they won't have to deal with this mine fire.  It's not ideal but it might come down to that.  It extends the thesis but won't kill it.  Waiting a couple years to make several times my investment isn't a bad deal.  Plus future optionality, etc.

 

The term sheet on this deal shows 75% dilution and so perhaps the market thinks that's the outcome when in reality it's more nuanced than that.  And it's extremely unlikely you would see 75% dilution because Murray will redeem before it gets to that point.  But I don't think the market understands that.  Or maybe it does but it's assigning too high of a probability to the 75% dilution event.

 

Anyway, an interesting situation for sure.

[awindenberger]

Keep up as much writing as you please Picasso, you've been invaluable in improving my understanding of the deal. I've been thinking on doing an SA article on FELP if I have some free time soon.

[Picasso]

More interesting comments by Murray. http://bit.ly/1sRT7E1

 

So he thinks he can do 60 million tons, seems high? Murray does about 35 million tons if I remember correctly. I need to look again or get the NDA to check their financials.  Their bonds ticked up a couple points today.

 

Anyone on this board the one who did the recent SumZero post?  If so, PM me. Thanks.

[KJP]

 

19.5 million tons @ $13 margins = $253 million of 2016 EBITDA. 

 

There's a recent VIC writeup on AHGP that asserts that AGHP/ARLP has historically maintained a significant ($12-14/ton) pricing advantage over Foresight for ILB coal because of better access to transport and higher quality coal.  The author describes Foresight's coal as "lower-quality coal geared for export markets." 

 

Do you buy this argument about ARLP's pricing advantage?  If so, what price are you using for the $13 FELP margin and what does that imply for AHGP's valuation? 

[Picasso]

I've been trying to find the source of this information, but JPM had this in one of their April report:

 

On a positive note, FELP strengthened its sales book this quarter contracting 3Mt of coal for a price range of $38.95/t- $42.35/t to Louisville Gas and Electric Co. and Kentucky Utilities Co. through 2019.

 

If you look at the last quarter, realizations are down to $37.  Produced tons sold in the 1Q was only 3,737 with 89,177 of cost.  So that's still less than $24 of cash costs per ton but it's only on 3,737 of tons sold so you're getting a lot of the fixed costs pushing down normal margins.  Annualizing 3,737 is only 15m tons but they're contracted for at least 4m more.  I think you can reasonably say cash costs are under $24 per ton and maybe closer to $22-23. 

 

$37 realized per ton on $22-23 per ton are $14-15 margins.  I thought $13 margin was being a bit more conservative.

 

FELP does have lower btu and quality coal than ARLP, but I don't think Hillsboro stays offline forever.  Their margins should improve quite a bit once that gets resolved, which should place them much more on par with ARLP.  But if it doesn't, then maybe $23-24 cash costs are the new normal.  But then they should sell Hillsboro?  Also exports are only about 2m tons at this point so it's clearly not just a low quality export producer.  There's optionality on their exports which are currently eating into their netbacks  from the Convent take or pays.  FELP also seems to have more stability on contracts for 2016 vs. 2015 but I need to recheck that for 2017. 

 

Also, if I'm not mistaken, ARLP has a lot more hedges that are running off in 2017/2018.  Their coal sales are running 20% higher than FELP, I didn't get the sense their coal is *that* much better, even though they have lower transport costs and higher btu to offset hedges running off.  There's also more capex at ARLP with lower reserves.  Not that the market even cares about reserves at this point, but I think future capex is probably being understated in their earnings today which makes margins less comparable.

[KJP]

I don't think ARLP has any hedges, but they do have some big coal supply agreements running off in the next few years.  I also can't square a big ARLP price advantage with this comment from ARLP's January 2016 call:

 

Lucas Pipes

 

My first question is pretty profane, but I hope you could maybe give me and investors that care about this very much a little bit of an update. And that is, where would you put the current spot prices for your products in the Illinois Basin? And, similarly, when you think about 2016, 2017, if you were to place additional volumes in the market, at what level do you think you would be able to realize for those tons?

 

Brian Cantrell

 

Lucas, I think the best way to answer that question is to talk about what we’ve actually contracted since our last call. In total, we've contracted about 7.5 million tons breaks [ph] through 2019 at an average price of about $41.73 per ton. That weighted average price reflects lower pricing in the near-term, but also includes contango in the out years at roughly 5% to 7% year-over-year. Looking specifically at the Illinois Basin, we contracted for about 6.5 million tons at an average price of $41.90. And in Appalachia, we contracted for 1.1 million tons at an average price of $40.66.

[Picasso]

Sorry I meant to say their contracted prices from previous years are rolling off and it won't be renewed at $50 levels in these market conditions. Hedging only applies to FELP as it relates to their export volumes.

[awindenberger]

I've been thinking about this more given all Picasso's recent posts on Murray's comments. Clearly Murray is betting that a Trump win in November will push up coal demand substantially. That would allow him to potentially sell assets into a more interested market in order to pay down the PIK loans.

 

I don't think Trump will be able to win, but there isn't really much downside given coals current situation.

[ragu]

[...]

Which means FELP only needs to come up with another $120 million plus accrued interest to redeem the rest. 

 

I don't believe the agreement allows for a partial redemption. Cline may well choose to convert, but there must be enough capital to redeem all of the Notes before he makes that election.

 

The agreement does allow for a Partnership Redemption and a Murray Purchase in conjunction, as long all the Notes are redeemed.

 

For the avoidance of doubt, a Partnership Redemption and the Purchase Right can be effected in combination as two transactions that close simultaneously, so long as at the conclusion of the combined transactions all (but not less than all) of the Convertible PIK Notes are redeemed, repurchased, refinanced, defeased or otherwise retired.

 

Best,

Ragu

[Picasso]

Right, it seems like we just need to estimate where the share price will be in a year under the assumption there will be $300 million of equity issuance as a reasonable bear case.  Worst case it's done at $0.88.  Then it will be a story of repurchasing a lot of these new units in 2017/2018.  Which would imply Cline is going to need to come in and help out Murray to get them through a few years of worthless subordinated shares that they paid $1.4 billion for.  Unless Cline is okay with Murray getting wiped out.  But they'd lose all the cost savings associated with the merger.

 

I wonder if the easiest thing to do would involve FELP selling a fixed up Hillsboro to the Cline Group and using those proceeds to retire all the PIK debt.  Distributions could be restarted and Murray would survive.  Cline's equity stake and IDR's would make a killing in exchange for turning into Murray's pawn shop. 

 

The biggest thing here is that Murray seems to be tight on time.  I don't think he can wait until 2020 to start getting paid on this investment.  They'll need to be really clever about how they pay down the PIK's.  Good thing they don't need to pay down $700 million by next April.  I could see how $1.75 is justified if that were the case.

[PullTheTrigger]

Monthly report on Fidelity holdings are out.

 

 

Fund      March 31st; February 29th

FNKLX  743k;          1021k

FEQIX  633k;            795k

FDESX  457k;            565k

VIPS    459k;            566k

FLMLX  110k;            155k

FEIRX    160k;            211k

FSESX  0;                  20k

 

So they started the year at 4.2 million shares, down to 3.3 million at end of February and down to 2.6 million at the end of March.  By my calculations they've just been sitting on 10% of trading volume and it's now their smallest position and they're the only large institutional owner.  They've gone from owning 22% of the float to 13% over those three months.  I think any stock with a 22% owner dumping down to 13% during a period of no liquidity and possible bankruptcy would kill the market price, which it obviously had/has.  We'll see where they end up at the end of April.

 

I can't find all the end of April reports for all the above listed funds, but did find the monthly FELP holdings for

FNKLX - $111,546

FEQIX - $114,662

[Picasso]

Seems like they're finally out.  They were long around $12, owned a huge chunk of the float, and dumped it all right as it's about to get resolved.

[Deepdive]

Interesting, the thread is now 33 pages. Is this an ominous sign?

[Picasso]

Interesting, the thread is now 33 pages. Is this an ominous sign?

 

It's only been a few months?  Most of that is my rambling anyway.

 

By the way, I decided to start posting my ideas here since guys on twitter make fun of CoBF. I don't think the board needs to be full of bad ideas with long threads. Why not contribute ideas to make it a little better?  And maybe some of the more obnoxious twitter guys can start shorting FELP just so they can be ultra edgy and contrarian. 

[sampr01]

Interesting, the thread is now 33 pages. Is this an ominous sign?

 

FELP restructuring just started and have until APR 2017 to make this thread 500 pages long.

[Picasso]

I attached the latest on Fidelity's stake.  They sold over 2 million units in April. 

[wachtwoord]

Doesn't it say they sold 1.6M instead of 2M?

 

They still account for 3.88% of the float. Selling will continue for another month I guess.

[Picasso]

There's a subset that expanded with different dates.  In March they sold 1.6 million units which shows as of file date 03/31.  But as of 4/30 there's only 250k shares left between all the funds. 

[Picasso]

Also they were a much higher percentage of the float than 3.88%.  The float is only about 20 million units.  But Accipiter owns 8.4 million units and Fidelity owned over 4 million units.

[awindenberger]

There's a subset that expanded with different dates.  In March they sold 1.6 million units which shows as of file date 03/31.  But as of 4/30 there's only 250k shares left between all the funds.

 

I just realized you must be showing up on that list  :D

[wachtwoord]

Also they were a much higher percentage of the float than 3.88%.  The float is only about 20 million units.  But Accipiter owns 8.4 million units and Fidelity owned over 4 million units.

 

Thanks I didn't realize it was 2 months old (I thought it was one month)

 

There's a subset that expanded with different dates.  In March they sold 1.6 million units which shows as of file date 03/31.  But as of 4/30 there's only 250k shares left between all the funds.

 

I just realized you must be showing up on that list  :D

 

Likely one of the form4's. A $65k holding will do to be on that list

[wachtwoord]

An independant member of the board of directors has passed away and needs to be replaced or FELP will be delisted. Likely nothing major.

 

https://biz.yahoo.com/e/160603/felp8-k.html

 

[PullTheTrigger]

I was curious about Accipiter Capital Management's position in FELP given they largely cover the healthcare sector.

 

It looks like Gabe Hoffman of Accipiter and Chris Cline are neighbors:

 

http://southflorida.blockshopper.com/taxes/by_subdivision/seminole_club

 

Hey, the Seminole Golf club is just down the street. Ya think they're members?

 

And it appears they attended political fundraisers in the past:

 

https://www.freespeech.org/tags/romney-fundraiser

 

http://articles.sun-sentinel.com/2012-09-20/news/fl-romney-back-in-palm-beach-20120920_1_romney-returns-mitt-romney-vip-photo-reception

 

Maybe they've had a few conversations?

 

 

[Picasso]

Ah, that's a really good find.  That explains the strangeness of their position in FELP. 

 

If he is close to Cline, it would probably be a bad sign if Accipiter started to sell.  Their last transaction was a purchase back in December after the court decision. 

[PullTheTrigger]

My thoughts exactly.