FELP - Foresight Energy

[Picasso]

Let me ask a couple more questions.

 

1. Cline has the cash to come in and settle, but is Murray in any type of similar situation? Could he come in with some type of settlement himself or is too late to raise that amount of cash? I'm not sure about his company and ability to raise cash.

2. I understand you're reasoning on the upside for Cline to settle, but what is the downside? I mean he could presumably just walk and lose his 30%, which is peanuts compared to the cash Murray just paid him. Is it worth the headache to settle? Is there a chance of losing more money if he settles? There is a lot of cash flow here, so the downside seems limited.

 

I look at the industry and regulations and like BG2008 says, it's a slowly melting ice cube and it would seem FELP is in a good position given it's low cost coal, but are there some political risks here as well? If a Democrat wins the White House, the EPA regulations will likely be continued or accelerated. If it's a Republican, will they try to roll back some of the coal regulations?

 

I realize this is coin toss, but it does seem like the coin is slightly weighted to settle.

 

Thanks for the interesting thread! I've learned a ton.

 

1) I don't think Murray has a lot of options to come in and help refund payment on the $606 million.  Murray Energy bonds have collapsed to $10 and it was very difficult to get the bonds to market when they acquired FELP in the first place.  That said, Bob Murray is an interesting guy and he might be able to chip in something.  Most of this is in Chris Cline's hands because he can fund everything on his own.

 

2a) On the downside, he loses over $50 million per year in distributions from FELP and SXCP.  He also loses a few hundred million on FELP and SXCP.  He might only lose $90 million on current market values for FELP and SXCP but I don't think he considers $1 for FELP as the real intrinsic value.  Last year FELP generated $136 million of DCF against a current market cap of $142 million.  What multiple do you give a coal business that can still turn significant positive cash flow at depression like conditions near the bottom of the cycle?  He's going to be giving that up.

 

2b) If he comes in with a bunch of new equity then I think you can make the argument he has capital at risk again.  I think if he came in with second lien 10% debt he would protect himself against a loss in equity value, being fulcrum in the case it enters bankruptcy in the future anyway, and there would still be over $120 million of 2015 DCF against a $142 million market cap. 

 

2c) Just for arguments sake, if he thought all equity was the best couse of action from a downside risk perspective (not sure why), you would end up with around $253 million of DCF on a $748 million market cap.  That's a lot of cash generation for Cline but it would bankrupt Murray.

 

2d) So it seems worth the headache to settle.  Unless he doesn't want to be in the coal business anymore.  His public comments certainly don't appear that to be the case.

 

I don't know how to handicap the political risks.  I think there's going to be a certain amount of diversification among sources of energy generation for various reasons and coal will be one of them.  But that's not why the stock is at $1, although it may be something Cline is considering when investing in the debt/equity at the current stage of the coal cycle.

[PullTheTrigger]

Thank you for your generous time answering my questions!

[BG2008]

Any idea what price the 7.875 bonds are currently trading at?  The most recent price according to the Finra website was from November 2015.  A lot could've changed since then. 

[BG2008]

Picasso,

 

A simple clarification.  Do we know what the bond holders and FELP are currently negotiating over?  Are there rumor mills, NY Post etc articles about sticking points in negotiation etc?  You're suggesting that Cline comes in and pays cash for new equity/2nd lien debt?  I'm assuming that's what you're talking about all along.  Do we need to worry about the company being in default after the bonds are taken care of.  Put another way, does the current level of performance triggers defaults in more senior portion of the debt structure?  How do you envision that being taken care of?

 

Thanks

[Picasso]

Any idea what price the 7.875 bonds are currently trading at?  The most recent price according to the Finra website was from November 2015.  A lot could've changed since then.

 

I attached the last few months.

[Picasso]

Picasso,

 

A simple clarification.  Do we know what the bond holders and FELP are currently negotiating over?  Are there rumor mills, NY Post etc articles about sticking points in negotiation etc?  You're suggesting that Cline comes in and pays cash for new equity/2nd lien debt?  I'm assuming that's what you're talking about all along.  Do we need to worry about the company being in default after the bonds are taken care of.  Put another way, does the current level of performance triggers defaults in more senior portion of the debt structure?  How do you envision that being taken care of?

 

Thanks

 

The bondholders want $101.  Bonds are currently trading flat. 

 

This article from Bloomberg is the only thing I found that gave some insights into the negotiations.  http://www.bloomberg.com/news/articles/2016-03-14/two-coal-barons-one-overdue-bond-payment-and-the-end-of-an-era

 

Matters have reached a point of such urgency that Murray is pushing Cline to chip in his own money, the people said. He wants the Foresight founder to either lend to the company or inject equity to help pay down some or all of Foresight’s 7.875 percent bonds maturing August 2021, said the people.

Another option is for Cline to fund a repayment of some of Murray Energy’s $3.4 billion of debt, said the people.

“I have not been involved in any negotiations respecting any aspect of Murray Energy’s capital structure and am not in a position to comment on that at all,” Cline said in the e-mail. “Foresight’s capital structure was and remains stand alone.”​

 

Last year they generated what I would consider a comfortable cushion above the leverage and interest coverage ratios.

 

Our covenants required a consolidated interest coverage ratio of greater than 2.00x and a consolidated net senior secured leverage ratio of less than 2.75x as of December 31, 2015. As of December 31, 2015, our consolidated interest coverage ratio and consolidated net senior secured leverage ratio were 3.00x and 2.50x, respectively.

 

Once Foresight takes care of this change of control mess, there aren't any default issues that worry me.  There is still the "going concern" issue with the 10-K, but that's due to the possibility that bondholders can accelerate repayment and they only have $20 million or so on hand.  It has very little to do with the actual operations.

 

I think you'll see some equity injected primarily to reduce the leverage a little and get the senior lenders comfortable with any amendments.  The company can then reduce debt fairly quickly with cash generation from operating results.  Everything comes down to settling with the noteholders.

[indirect]

There is a binary outcome to the negotiations with the bondholders. One way to play it is 3/4 of the position to Felp bonds and 1/4 in the equity. Either way you are buying into the lowest cost US coal producer in the country with minimum risk of loss of principal. 

[Picasso]

That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info?  Perhaps... Perhaps not...

[Green King]

That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info?  Perhaps... Perhaps not...

 

This is a interesting situation. How do you view the drop in illmois Basin coal spot price and its effect on cashflow ? Since opearting leverage works both ways.

https://www.quandl.com/data/EIA/COAL-US-Coal-Prices-by-Region

 

TIA

[Picasso]

That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info?  Perhaps... Perhaps not...

 

This is a interesting situation. How do you view the drop in illmois Basin coal spot price and its effect on cashflow ? Since opearting leverage works both ways.

https://www.quandl.com/data/EIA/COAL-US-Coal-Prices-by-Region

 

TIA

 

Current ILB coal pricing is where all their competitors are under water.  ILB coal pricing has been at these levels for half of 2015, yet they still generated substantial free cash flow and covered interest expense 3x.  I've tried to picture an environment (in the next few years) where ILB pricing sinks to a point where they're violating debt covenants.  It's really hard to get there unless their operating expenses suddenly increase by 50%. 

 

Here is an older WSJ article that describes the Foresight advantage pre-IPO:

 

http://www.wsj.com/articles/foresight-energy-bets-that-theres-gold-in-coal-1403042566

 

Demand for Illinois Basin coal generally is expected to increase to 185 million tons in 2020 from 102 million tons last year, according to consulting firm Wood Mackenzie. The firm expects that by 2025 all coal-fired utilities will have scrubbers.

 

"Somebody's going to survive, and it's going to be the low-cost producers," says Wood Mackenzie analyst Matt Preston. "There's no reason to expect they're not going to be profitable for at least the next four or five years."

 

Foresight, whose workforce isn't unionized, controls three of the four most productive coal mines in the U.S. The company said in its filing that it sells a significant portion of its coal under long-term deals. Foresight already has sold 85% of its production for this year and 64% for next.

 

The company also is looking to increase exports. Foresight, one of the largest U.S. exporters of thermal coal, has exported roughly 36% of its output since 2008. The company opened a barge terminal in southern Indiana on the Ohio River to move coal to New Orleans and from there, to Europe, South America, Africa and Asia. Foresight is the biggest supplier to England's largest power plant.

 

I think that backdrop leaves them fairly well positioned.  They've sold 22 million tons in 2014 and 22 million tons in 2015.  Before they dropped guidance, they also seemed confident about getting close to 21 million tons in 2016.  Given they have capacity for over 30 million tons (existing capex is already built into the 30 million tons of capacity) I don't think the actual business operations is going to hurt the financial results even with the Deer Run mine fire.  But if they have to sell some assets in bankruptcy and Deer Run has no buyers/keep burning then I think costs start moving up quickly and current ILB pricing can kill any profitability.  It's part of the reason why I think the bondholders don't want to take this into bankruptcy as a loan to own.  What are they going to sell to repay the $300 million term loan without killing the rest of the company?

 

Most of my research indicated full cycle ILB pricing in the $40's.  There's some pressure at the moment from low nat gas and zombie coal players ignoring depreciation to keep mining for cash flow but that doesn't mean utilities will suddenly abandon coal on their roughly 250 scrubbed plants.  If a full cycle price is in the $40's then I'm not too worried about pricing in the $20's that will persist long enough to hurt FELP earnings and trip covenants.  It's possible but not very likely.

 

I should also note that Murray has been purchasing Columbian mines to blend with ILB coal and sell into the export markets.  They have below market contracts with the export terminal in Louisiana (that Cline used to own before selling to SunCoke Partners in exchange for cash, seller financing, and SXCP units) so if that ends up successful then the short-term ILB pricing is less of a worry.  That said, the export terminal is an option on the ability for Foresight and Murray to sell outside the domestic markets.  I just thought I would mention it in case people thought this was only a domestic coal play.  Murray and Cline are fairly savvy about looking ahead several years.  Too bad they didn't hire better lawyers at the time of the FELP change of control.

 

There are also some various supply cost curves out there.  This presentation from Foresight in late 2014 has a slide with various mine cash costs (slide 7).  I don't think you need to make a bet on the commodity price here, you just have to assume pricing will average "something" over the industry supply curve.  The difference in a "little something" and "a lot something" is the difference between a 5 bagger and a 10+ bagger assuming minimal dilution.  I'm certainly not trying to make a bet that coal goes up but even if pricing stays here they shouldn't be violating any covenants. 

 

https://coaltrade.org/wp-content/uploads/2015/09/Mike_Moran_Foresight.pdf

[Picasso]

And just a couple more thoughts to expand on BG's question.

 

It's entirely possible that nat gas goes to some insanely low price in 2016, 2017 etc.  There's been a bounce in the energy markets lately but these things tend to move in big waves and if energy rolls over again, it may end up being more devastating than what we've already seen.  That's not exactly the time I would want to be selling coal assets in a bankruptcy.  Maybe you can get ARLP to buy something, but their stock has already been crushed and these partnerships have a very high cost of capital at the moment.  You're not going to create accretive acquisitions at ARLP by selling equity or debt today unless you buy up FELP assets at prices that hurt the bondholders. 

 

The value in FELP is in keeping the current cost and capital structure, or at least something similar.  So when someone asks me "why is it taking so long to negotiate," Chris Cline must figure something along these lines as well.  The bondholders aren't going to make a killing unless they want to suddenly be strategic owners of a coal business long term and recreate an LP out of bankruptcy with half as many assets.  Even then it's debatable how much they might make.  For that reason I think Cline/Foresight doesn't want to give "par plus" on a settlement but something less.  But the bondholders know they can refinance at "par plus" (Cline is sitting on enough cash), so why take less?  It's quite the game of chicken.

[Green King]

Thank you for the answers.

 

 

[enoch01]

Thanks for the idea Picasso.  Nice game of chicken they have going on here.

[Picasso]

Part of what I think explains the current price is this hedge fund Accipiter Capital.  I attached their holdings.

 

Here's a little bio:

 

Accipiter Capital Management, LLC is an employee owned hedge fund sponsor. The firm primarily provides its services to pooled investment vehicles. It invests in public equity markets of the United States. The firm primarily makes its investments in equity securities in the life science, biotechnology, pharmaceuticals, medical device, healthcare providers, managed care, and health care service sectors. It employs fundamental analysis to make its portfolio. The firm obtains external research to complement its in-house research. Accipiter Capital Management, LLC was founded in 2002 and is based in New York City

 

Now get this... They bought roughly 6.4% of all FELP shares outstanding last quarter.  They also bought $25 million worth of VRX in the $100's.  But more importantly, why the hell did they buy $50 million of FELP at $6?  It doesn't fit their circle of competence at all.  And FELP is the bulk of their equity portfolio.  The rest of their portfolio has been getting smoked so maybe they have some redemption pressures.

 

Assuming they're the fund selling here, there just isn't enough liquidity to get out.  Average volume is in the 100k share region, they need to unload 84x that.  So I think you have some interesting dynamics with a low float and seller that may want out of a badly timed purchase. 

 

Or it could be Fidelity and Accipiter is just riding out that mistake.

[Picasso]

Actually it looks like Accipiter was buying as recently as Dec 31st @ $2.89.  I'm looking through all the Fidelity funds with FELP as a holding and they've been selling since the start of the year.  i.e., Fidelity Equity-Income Fund (FEQIX).  It's still a very unusual holding for Accipiter.

[RadMan24]

Lowest cost producer, transportation increases costs and limits full capacity of 30 million, steadily declining output, heavy debt load, declining industry, and no positive catalysts regardless of peer bankruptcies.

 

Is that a fair assessment? Consol Coal currently yields near 30%, but DCF valuation has it at a earnings yield of 15%.

 

In order for these coal companies to receive higher valuations, coal prices and/volumes have to increase. Does anyone have any idea when that will happen? Any signs that it is or catalysts for it to happen are underway?

 

I've been warning against coal since 2013 after being burned in 2011. Best thing I've ever did was sell Peabody at $35 (unsplit price) after buying at $60. Adjusting for split terms, $60 translated to when Peabody was $1,100. Yet, Peabody is still "surviving."

[Picasso]

Well the catalyst is a settlement with bondholders and not filing for bankruptcy. 

 

CNXC is trading at a 20% DCF yield right now, FELP is trading something north of 100% from 2015 figures with half the cost structure and 4x the reserves.  It will take you five years to get your investment back in CNXC from distributions, if 2016 is a trough year.  That kind of a yield once the change of control issues are resolved would put FELP back at some multiple above the current share price.  Whether it's $3 or $5 or whatever depends on how much dilution takes place.

 

The question is whether you think 2015/2016 is more of a trough or still halfway through a bad cycle.  As long as the debt is manageable I think you should give a full cycle "average" valuation to something like FELP because they'll make it through.  I don't know how you value something like CNXC other than a dividend discount approach declining towards zero because you don't know if there will be any free cash to distribute in five years.

 

But in the short-term the default issues need to be resolved... we can worry about the cyclical/secular coal stuff once it trades at a price that makes that more relevant to future returns.  Although I'm sure Cline, Murray and the bondholders are thinking about their strategy and the outlook for coal when figuring out a deal.

[randallchsu]

If there is any value in the commons, why wouldn't Cline and Murray called in the units at $1 or however low it might be?

 

"Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner has the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed."

 

 

[Picasso]

Right now Murray's units are not common units and they won't become common units for a while.  Those subordinated units are still "out of the money" by $2 of distributions per unit.  That's why they need to resolve this mess, not dilute too hard, and focus on managing the partnership for DCF. 

 

The GP can call in the stock once they convert those subordinated shares and own the bulk of the common units.

[RadMan24]

Didn't Murray suggest coal demand in the US will drop to 650 million tons or so? That's a long way to go.

 

Regardless, what are your views on Felp being a MLP rather than a C corp? In situations like this, do you believe it's a beneficial structure to its long-term health?

[bigbadwolf]

EFFECT filed with SEC - also another 8-K for an extension until 4/5.  Wonder if we are approaching a resolution.

 

https://www.sec.gov/Archives/edgar/data/1540729/999999999516004059/xslEFFECTX01/primary_doc.xml

 

[awindenberger]

EFFECT filed with SEC - also another 8-K for an extension until 4/5.  Wonder if we are approaching a resolution.

 

https://www.sec.gov/Archives/edgar/data/1540729/999999999516004059/xslEFFECTX01/primary_doc.xml

 

What is a form EFFECT? There's no info in the filing.

[Picasso]

Here are some excerpts from the court filings from last year.  It's both interesting and funny.

 

4. Murray Energy and Foresight are coal mining companies operating

below ground coal mines concentrated in Illinois, Ohio, and West Virginia. Even

before the acquisition of control of Foresight, Murray Energy was one of the

largest underground coal mining companies in the United States, with Foresight

being possibly the most cost efficient underground coal mining company in the

United States. Combined, the two companies mine approximately 10% of the coal

mined in the United States. Both companies employ “longwall” coal mining

technology, a highly automated method using far fewer miners than traditional

underground mining. The coal industry in general has fallen on hard times, and

Robert Murray, the chief executive officer (“CEO”), owner, and founder of Murray

Energy, has taken advantage of the downturn to go on an acquisition spree,

acquiring other mining companies to increase the market power and operating

efficiencies of Murray Energy. Mr. Murray has publicly announced that he plans

to be the “last man standing” in the coal industry, and has also stated that “coal is

all he knows,” and that he has no plans of retiring.

 

5. By contrast, Mr. Cline gives every appearance of wishing to move on

from a lifetime in the coal mining business and to enjoy the wealth he has created

while pursuing other interests.

 

6. In short, while Mr. Murray seeks to increase his investment in coal

and continue his full-time involvement in the coal mining business, Mr. Cline

wishes to reduce both his investment in coal and the amount of time he spends

running the coal company he founded.

 

7. Given Mr. Murray’s desire to expand his coal business and Mr.

Cline’s desire to reduce his investment in, and commitment to, Foresight, it was a

natural fit for Murray Energy to acquire a controlling interest in Foresight.

Accordingly, on March 13, 2015, Murray Energy and Foresight Reserves

announced that for an aggregate purchase price of $1.395 billion, Murray Energy

would acquire approximately 50% of the FELP equity interests, 77.5% of the

Foresight Incentive Distribution Rights (which, as described below in paragraphs

63-66, provide economic upside and align the interests of the party controlling

Foresight with the interests of FELP’s other equity holders), and an 80% interest in

FEGP (collectively, the “Proposed Transaction”).

 

.......

 

10. Recognizing that the Proposed Transaction would therefore obligate

the Issuers to make an Offer to Purchase, and not wishing to be forced to refinance

the Notes if all or a substantial portion of the holders of the Notes accepted the

Offer to Purchase (the total issuance of the Notes is $600 million), the Issuers

commenced a consent solicitation pursuant to which they agreed to pay the

consenting holders of the Notes (the “Noteholders”) a fee of 8 points (8% of the

face amount of the consenting Notes, equaling $48 million) in exchange for an

amendment of the Indenture so as to not trigger the Offer to Purchase, subject to

the closing of the Proposed Transaction (the “Consent Solicitation”).

 

11. On March 30, 2015, Foresight announced that it had “reached an

agreement with the holder of greater than a majority in aggregate principal amount

of the Notes, pursuant to which such holder has agreed to consent with respect to

all of its Notes.”

 

12. In spite of receiving this consent, Murray Energy and Foresight

Reserves did not close on the Proposed Transaction, and instead fashioned a new

transaction which gave the appearance, but not the reality, of stopping just short of

a Change of Control.

 

13. On April 7, 2015, Murray Energy and Foresight Reserves announced

that they had entered into a new agreement, whereby Murray Energy would

acquire, for an aggregate purchase price of $1.37 billion (a reduction of just $25

million from the original proposed purchase price of $1.395 billion),

approximately 50% of the FELP equity interests, 77.5% of the Foresight Incentive

Distribution Rights, a 34% “voting interest” in FEGP, and an option to purchase an

additional 46% of FEGP for only $25 million during a five-year period (the “New

Transaction”).

 

14. The Issuers thereupon withdrew their Consent Solicitation, and both

Murray Energy and Foresight announced, in a press release dated April 7, 2015,

that “[a]s a result of the new transaction terms, no change of control will result

under . . . the indenture governing FELP’s senior notes . . . which will remain in

place . . . . after the closing”.

 

15. However, this attempt by Murray Energy and Foresight Reserves to

escape the Issuers’ obligation to make an Offer to Purchase fails.

 

So they could have simply paid the $48 million (which the bondholders were okay with) and instead they altered the deal a bit (presumably to save that $48 million) and they're now at risk of losing everything. 

 

And what has to be the most understated comment from the court in November of last year:

 

28. The consequences that may flow from the Court’s

Memorandum Opinion cannot negate the correctness of the Court’s reasoning and

holding. Furthermore, these consequences were entirely foreseeable, and

ultimately result from Foresight’s inexplicable failure to even try to reach an

accommodation with the Plaintiff prior to the issuance of the Court’s

Memorandum Opinion. Foresight did not attempt to contact the Plaintiff during

the entire course of this litigation, even after the November 17, 2015 argument on

the Motions, which concluded with this Court’s suggestion that:

 

I’d encourage you-all to talk about this. It seems to me

that this is a situation where, depending on how it plays

out, it could be disruptive to the entity. And so if there

are ways to avoid that type of disruption by working out

some type of consensual resolution, I think it’s probably

a decent idea.

 

Probably a decent idea indeed.

Bloomberg_Document_1.pdf

Bloomberg_Document_2.pdf

[Picasso]

Didn't Murray suggest coal demand in the US will drop to 650 million tons or so? That's a long way to go.

 

Regardless, what are your views on Felp being a MLP rather than a C corp? In situations like this, do you believe it's a beneficial structure to its long-term health?

 

If they pull through this change of control thing, then there's plenty of return in the LP structure until Murray's shares convert and you start losing to the IDR's.  Being an MLP no longer implies a low cost of capital (well some are still low cost capital sources but they tend not to have leverage or investment grade, giant sponsors) and this is coal related so will it ever trade similar to other "yield co's?"  Will it ever trade at a 8% DCF yield again?  I kind of doubt it.  But it isn't inconceivable that you can pull out multiples of $1 in distributions if they make it through.

[awindenberger]

Didn't Murray suggest coal demand in the US will drop to 650 million tons or so? That's a long way to go.

 

Regardless, what are your views on Felp being a MLP rather than a C corp? In situations like this, do you believe it's a beneficial structure to its long-term health?

 

If they pull through this change of control thing, then there's plenty of return in the LP structure until Murray's shares convert and you start losing to the IDR's.  Being an MLP no longer implies a low cost of capital (well some are still low cost capital sources but they tend not to have leverage or investment grade, giant sponsors) and this is coal related so will it ever trade similar to other "yield co's?"  Will it ever trade at a 8% DCF yield again?  I kind of doubt it.  But it isn't inconceivable that you can pull out multiples of $1 in distributions if they make it through.

 

Given that the annual minimum distribution is $1.35, and there will be three years of subordination, thats an understatement. Still, I think its probably worth waiting to see the settlement before buying in.