FELP - Foresight Energy

[PullTheTrigger]

Understood. I just think sometimes the "club" type relationships are how a lot of money is made.

 

Feel better. Must be something going around. I was sick yesterday.

[valcont]

Thanks for the color Picasso. This is a complicated scenario with the restructuring, going concern, tax laws thrown in the mix. Which makes it a good investment but it can go really bad if I miss something that the market understands. At this price level , I assume the sophisticated investors are involved (or not) so I am crossing all the t's and dotting the i's. I thought I understood the risks last year when I bought into Ocwen. It was going through the same going concern issues with all kinds of doomsday scenarios but the book value seemed fair and they were the best in subprime servicing. But things went from bad to worse and market was proven right.

[Picasso]

I remember playing with some numbers on the worst that could happen a few months back.  If all the PIK debt converted at sub $1, then the units would probably be worth at least $2.  Because you'd end up with 365 common million units or so, and with $100 million of DCF maybe $0.27 of DCF per share.  If it's worth 10x, that's $2.73?  Sub units would be worthless.  At 7x it's worth $1.89.  Or whatever you end up with.  Maybe DCF is lower or higher.  Which is why I think the units are still cheap because it's pricing in a lot of dilution.  And it's probably there won't be.  Especially when you look at their earnings last quarter and where stocks like CNXC or ARLP trade now. 

 

Maybe the risk is that 2017, 2018, 2019 will be terrible for ILB or FELP coal.  That's sort of the wild card here.  They seem so well positioned for almost any coal conditions but perhaps that isn't the case.  Maybe leverage stays too high while coal gets worse and contracts roll off? 

 

But then you have to step back and think that the two guys who own 85% didn't dilute you over a really bad change on control during the worst possible time to experience a put back on a high yield coal bond.  They could have if they really wanted to.  Why bother waiting for PIK's to come up, just dilute it now while they can.  But again, the Cline/Murray check and balance.  So if they're willing to step up during this hard time I think they'd do their best to manage through anything else.  Can't be any worse than what they've gone through the past year?  Or can it... Famous last words...

[wachtwoord]

Picasso, do you mind explaining the sibordinated unit situation? Who owns them? How many are there? Are they out of the money in the sense they only receive distributions after some threshhold distribution to regular units?

 

Apologies if this was explained before.

[hswoon]

Total shares 130m. 65m common units (that's us), 65m subs (that's Murray). Murray bought 50% for 1.4b which included the subs and i think something like 80% of the GP's idrs.

 

As per 2015 10k:

 

All subordinated units are currently held by Murray Energy. The principal difference between our common units and subordinated units is that

subordinated unitholders are not entitled to receive a distribution from operating surplus until the holders of common units have received the

minimum quarterly distribution (“MQD”) from operating surplus. The MQD is $0.3375 per unit for such quarter plus any cumulative arrearages of

previously unpaid MQDs from previous quarters. Subordinated unitholders are not entitled to receive arrearages. The subordination period will end,

and the subordinated units will convert to common units, on a one-for-one basis, on the first business day after the Partnership has paid the MQD for

each of three consecutive, non-overlapping four-quarter periods ending on or after March 31, 2017 and there are no outstanding arrearages on the

common units. Notwithstanding the foregoing, the subordination period will end on the first business day after the Partnership has paid an aggregate

amount of at least $2.025 per unit (150.0% of the MQD on an annualized basis) on the outstanding common and subordinated units and the

Partnership has paid the related distribution on the incentive distribution rights, for any four-quarter period and there are no outstanding arrearages

on the common units.

 

So it will be a while until Murray gets to convert his subs to commons. If they end up paying distributions in 2018, they will need to pay out at least that year's worth of mqd's plus about $3 in arrears (inc q4 2015) before Murray will see a cent for his subs.

 

The out of the money distributions are for the IDRs which are for the GP:

 

Minimum quarterly distribution $0.3375 100.0% —

First target distribution Above $0.3375 up to $0.3881 100.0% —

Second target distribution Above $0.3881 up to $0.4219 85.0% 15.0%

Third target distribution Above $0.4219 up to $0.5063 75.0% 25.0%

Thereafter Above $0.5063 50.0% 50.0%

 

By the time Murray sees a cent on the IDRs this stock is probably a 10 bagger I think.

[hswoon]

At this price level , I assume the sophisticated investors are involved (or not) so I am crossing all the t's and dotting the i's.

 

Do you mean that a requirement is for other funds to be in the trade for you to be in the trade? I think it's more important to have some for of operator ownership rather than fund ownership...

[wachtwoord]

Thanks for clarifying :)

[valcont]

At this price level , I assume the sophisticated investors are involved (or not) so I am crossing all the t's and dotting the i's.

 

Do you mean that a requirement is for other funds to be in the trade for you to be in the trade? I think it's more important to have some for of operator ownership rather than fund ownership...

 

I meant that in these situations , you are really competing against niche funds in restructuring and the bond market. The bond market tells me that the equity is not going to be worthless. The only question than is what are the units worth? The price action tells me that there is a lot of uncertainty in this trade. It could be all the reasons that Picasso has stated. But it may be that FBR is correctly assessing the extreme liquidation risk and assigning it a $2 price tag.  BTW Picasso has  done a nice job valuing it.

[Picasso]

Results of the consent solicitation came back.  Since Cline owns $83 million face on the notes, the $504 million of non-Cline note holders consenting to an amendment to allow the exchange to happen tallies it to $587 million out of the $600 million outstanding.  Which is 98%?

 

And Murray has been able to work out a deal with their senior lenders as well.  Those notes have rallied up to 36. 

 

Everything seems to be falling in place quite nicely.

[sampr01]

is that mean restructuring is done and no more in default?

 

Results of the consent solicitation came back.  Since Cline owns $83 million face on the notes, the $504 million of non-Cline note holders consenting to an amendment to allow the exchange to happen tallies it to $587 million out of the $600 million outstanding.  Which is 98%?

 

And Murray has been able to work out a deal with their senior lenders as well.  Those notes have rallied up to 36. 

 

Everything seems to be falling in place quite nicely.

[hswoon]

Deal is 'consented' for the 'effective date' which is Aug 31st.

[Patmo]

Results of the consent solicitation came back.  Since Cline owns $83 million face on the notes, the $504 million of non-Cline note holders consenting to an amendment to allow the exchange to happen tallies it to $587 million out of the $600 million outstanding.  Which is 98%?

 

And Murray has been able to work out a deal with their senior lenders as well.  Those notes have rallied up to 36. 

 

Everything seems to be falling in place quite nicely.

 

Kind of a technicality, but out of curiosity, how do you decipher that the $504mil are non-Cline? From the language it felt to me like 504mil total. Doesn't FELP have to "solicitate" Cline as well, although it would be a formality?

 

It feels a bit misleading to mention the issuer has 600mil outstanding then leave the Cline portion in the very next sentence, especially considering this filing is from the eyes of the issuer and not Cline

[Picasso]

Cline can't consent because he's an affiliate. 

 

Pursuant to the Existing Senior Notes Indenture, the written consent of holders of at least a majority in aggregate principal amount of the outstanding Existing Senior Notes that were not owned by the Issuers or one of their affiliates as of the record date for the Consent Solicitation (June 30, 2016), voting as a single class, was required to adopt the Proposed Amendment.

 

The noteholders representing $504,346,000 in aggregate principal amount of Existing Senior Notes that responded to the Consent Solicitation each consented to the Proposed Amendment.

[wachtwoord]

$100 million of DCF gets you to a $500 million market cap @ a 20% yield.  It's a question of how much they dilute on a settlement.  If the unit count goes from 130 million to 200 million, the upside will only be $2.50.  But you don't need that much dilution and I think $100 million of DCF is probably close to the near term economics here.  And Murray can't afford too much dilution.  The more I've played with the numbers short-term upside is probably between $4-5.  Long-term, especially when adjusted for distributions, can be a lot higher.

 

But like I mentioned in a previous post, it's going to be tricky owning this *after* a settlement (assuming it happens) when you can see 25 million tons shipped at $15-20 EBITDA margins per ton sometime in the future.  That would push over $300 million of DCF and the market might be willing to price it at a 10% yield.  Suddenly the market cap is $3 billion again and it's a 20 bagger.  There's some real optionality here that would seemingly make it hard for Cline or Murray to just give up.  In the meantime, a 20% yield on bottom of the market DCF seems like an okay benchmark when compared to ARLP or CNXC.

 

Dug this up from earlier in the thread. We're nearing the bottom of this (conservative) valuation range (ignoring the $0 if Cline dies :p) $500M market cap. What are people's ideas about valuation?

 

In the topic I've seen $75M DCF estimated for 2016 which at 20% yield which would imply ~$2.86 a unit ($5.73 @10% yield) undiluted. But that's seems a very pessimistic view on earning power long term. If they return to $42M DCF a quarter it would be $6.41 a unit @20% yield. If it really goes back to $90M DCF it's $13.74 a unit @ 20% yield undiluted.

 

I'm just playing with number here because the price is rising quite rapidly and this is easily my largest position now so I should come up with a more precise idea about the value to be able to decide when to start selling. That this was cheap <$2 seemed obvious (of course without Picasso I would never have found this) and I still think it's cheap at the current price but find it difficult to estimate the chance of DCF going up.

 

Does anyone have some updated views on this which I can weigh in?

[Picasso]

Here are some of my thoughts.

 

1) Similar comps of CNXC or ARLP are now trading at 10% yields instead of 20%.

2) I really think FELP is a better asset than either CNXC or ARLP.

3) FELP is able to take advantage of this jump in API 2 more than anyone else.  Incrementally there's little downside to this export business but they have the upside that other ILB/NAPP comps do not have.

4) Unlike other comps, FELP has half the equity structure in subordinated units.  So you won't feel the full blunt of dilution and earnings will almost entirely accrue to the commons for several years.

 

So how do you value that?  If we start with 71 million common units including the upcoming warrant issuance, we'll need to know how many units can get issued to refi the $350 million PIK next year.  If it's done at $4, that will add 87.5 million units for a total of 159 million units. 

 

If we have $100 million of DCF, there would be $0.63 of earnings which would make the commons trade for 6x assuming it was somehow diluted at $4.  If you throw in the sub units, then there would be $0.45 of earnings per unit which would still be less than 10x.  So I think it would be strange for FELP to dilute at $4 in a year because the issuance price should kind of match up to a 10-15% yield or a 10-8x multiple of DCF on a pro-forma diluted basis. 

 

If the refi is done @ $8, then commons go up to 113 million units which is about $1 of DCF/unit and that would be an 8x multiple.  Include the sub units, a 14x multiple. 

 

If you play around with those numbers you can kind of triangulate $6-8 if DCF stays around $100 million.  That assumes no refinance of the debt and simply 100% equity issuance to pay off the PIK's. 

 

Ideally we'd want to do a present value calculation of all the future cash earnings attributable to the LP.  But right now it's hard to estimate that because we only have a couple years of visibility.  A lot of things can change in a few years, but I feel like this is a great coal asset and over time the earnings should be many multiples of what I paid for it.  Hopefully the units are trading towards the higher end of my "estimates" so the dilution is a bit less.  And in a blue sky scenario they can just refinance out the debt.  But I'm leaning more towards assuming we'll see equity issuance by next October.

[wachtwoord]

Thanks Picasso :)

[heth247]

The question is how will the Market value FELP over the next 12 months, since they won't be able to pay out any dividend until later half of 2018.

 

Here are some of my thoughts.

 

1) Similar comps of CNXC or ARLP are now trading at 10% yields instead of 20%.

2) I really think FELP is a better asset than either CNXC or ARLP.

3) FELP is able to take advantage of this jump in API 2 more than anyone else.  Incrementally there's little downside to this export business but they have the upside that other ILB/NAPP comps do not have.

4) Unlike other comps, FELP has half the equity structure in subordinated units.  So you won't feel the full blunt of dilution and earnings will almost entirely accrue to the commons for several years.

 

So how do you value that?  If we start with 71 million common units including the upcoming warrant issuance, we'll need to know how many units can get issued to refi the $350 million PIK next year.  If it's done at $4, that will add 87.5 million units for a total of 159 million units. 

 

If we have $100 million of DCF, there would be $0.63 of earnings which would make the commons trade for 6x assuming it was somehow diluted at $4.  If you throw in the sub units, then there would be $0.45 of earnings per unit which would still be less than 10x.  So I think it would be strange for FELP to dilute at $4 in a year because the issuance price should kind of match up to a 10-15% yield or a 10-8x multiple of DCF on a pro-forma diluted basis. 

 

If the refi is done @ $8, then commons go up to 113 million units which is about $1 of DCF/unit and that would be an 8x multiple.  Include the sub units, a 14x multiple. 

 

If you play around with those numbers you can kind of triangulate $6-8 if DCF stays around $100 million.  That assumes no refinance of the debt and simply 100% equity issuance to pay off the PIK's. 

 

Ideally we'd want to do a present value calculation of all the future cash earnings attributable to the LP.  But right now it's hard to estimate that because we only have a couple years of visibility.  A lot of things can change in a few years, but I feel like this is a great coal asset and over time the earnings should be many multiples of what I paid for it.  Hopefully the units are trading towards the higher end of my "estimates" so the dilution is a bit less.  And in a blue sky scenario they can just refinance out the debt.  But I'm leaning more towards assuming we'll see equity issuance by next October.

[benhacker]

Picasso....

 

<bows deeply>

 

I hope you are drinking something nice tonight (today?).  $4.00.

 

You picked your spot, and called your shot.

 

Thanks again for sharing, and congrats.

[Picasso]

Thanks Ben.  I'm still "hodling" but happy to see things play out positively.  I sound like a broken record but I still think it's super cheap.

 

It will be interesting to see where the new notes start trading.  One year PIK paper at 15% would be great to pick up.  It's not high octane FELP equity returns, but better than 0% while I work on some other ideas.

 

And in case anyone didn't know this, 25% of SXCP earnings come from FELP and Murray.  SXCP is up 7% today, but I think SXC is more levered to this outcome based on the share price.  It wouldn't surprise me to see some kind of capital allocation change at SXC once the restructuring is effectively done.  And Mangrove was just a buyer at $7 as well.

[awindenberger]

I'll throw in a thank you as well Picasso. I only wish I had been more aggressive buying at $1.20 than I was in response to your posts at the time.

[PullTheTrigger]

Thank you Picasso and congratulations!

 

 

[valcont]

Joining the crowd here. Thanks a lot Picasso. This was an event driven investment for me based on Murray's investment. Had I not read your posts on valuation, I would have gotten out after they were out of default.

[Patmo]

Are you guys all selling already? The party's just getting started...

[valcont]

Picasso et al,

  What are your thoughts on Murray's plan for post default FELP? One of the reasons he paid up for it last year was potential tax advantaged drop down  from Murray to FELP with lower cost of capital and to use FELP to buy up the coal assets by accessing the capital markets. This isn't true anymore although he can still get some accretive synergies. FELP wouldn't trade as stable yield vehicle for atleast a year or two so until then aren't we in a commodity play here?

[tgrafos]

Thank you Picasso for all this great work!