FELP - Foresight Energy

[valcont]

My understanding of the Goldman report was the forecast of coking coal going into China?  I didn't see them make any mention of the coal exports that Foresight participates in.

 

Here is an article that talks about the recent run up in prices for both thermal and coking coal.

 

http://www.abc.net.au/news/2016-08-24/coal-price-spike-on-back-of-reduced-chinese-mining/7776904

 

The fear was that China would relax the mine restrictions but Goldman validated that the higher price is here to stay.

[Guest roark33]

Not to be overly sarcastic, but Goldman validating a price of a commodity does not seem to give me much comfort. 

 

My point is mainly that this is a leveraged commodity play, plain and simple.  If you pick the absolute bottom, you are going to make a killing, but if the price of the commodity declines before you sell (chasing those long-term capital gains rates), you are still exposed to the commodity risk....and the leverage. 

[Picasso]

You don't have to pick the absolute bottom in a commodity turn to make a killing in a producer.  You just need a price that already accounts for further headwinds/losses/acts of good/whatever.  The upside will be whatever it is.

 

Here's the U.S. coal outlook from the EIA.

 

Supply (million short tons)

                                2014 2015 2016 2017

U.S. Coal Production 1000.0 897.0 732.8 764.4

 

FELP has massive reserves, the lowest cost structure in the only coal region that's actually expected to grow, and is currently only doing about 16 million tons into the domestic coal market.  Where exactly do you see those U.S. coal production numbers heading where FELP can't place an average of at least 20 million tons?  We've already seen their production numbers over the past year while the rest of the industry has imploded.  It's been pretty stable which indicates to me that FELP is at a minimum a stable base load in the coal industry (granted coal in general is now more variable than fixed because of nat gas pricing).  Take a look at the rest of the coal industries cost curve.  FELP's cost per ton seems to be nearing $20 again, so I don't really understand what scenario you picture in the future? 

 

Meanwhile you have export pricing going up which will smooth over the rough transition into 2017/2018.  Netbacks are over $30 now, which on incremental tons can mean something like $20 margins to FELP.  If they max out their SXCP contract volume over the next year (spot netbacks are closer to $40) that alone is an extra $50-100 million of cash coming in I didn't anticipate a few months ago.  If the EIA is only roughly right on their 2017 forecast and their longer term ILB projections, it's not hard to see pretty solid cash flow for the next couple years.

 

And again I've never argued that coal is going to make some epic comeback.  This is a fairly simple situation where FELP will take larger portions of a smaller pie.  But for arguments sake, lets say there's no terminal value at some point.  It's high probable you'll see more than the current share price in distributions if you can just wait a few years.  I can't say the same for the likes of an ARLP.  It could be ten years or longer before you recover the current share price in distributions from other coal plays. 

 

And this isn't about playing for long-term capital gains.  I think the risk profile is still much better than anything else I've researched lately, so I'm buying more because I still expect a solid return with limited risk on new capital invested.  Plus I have the luxury of pledging my account to a private bank at up to 50% LTV without worrying about margins calls.  They just check the statement value at the end of each month and give me two weeks to meet a deficiency balance should my holdings take a beating.  So if I find something else that I would like to invest in (I haven't used margin yet because I haven't seen anything that good), I can pull out some fairly stable leverage to make the investment.  So it's not like I have to sell FELP just to move the deck chairs around and make it seem like I'm doing something.  Given the valuation, selling and paying tons of short term capital gains isn't that wise either.  You can suck up some amount of volatility once you end up with this kind of problem because the net return for being patient an extra year is fairly substantial.  In addition to the returns that FELP is likely to provide as it rolls into a more favorable tax situation.

 

As for the leverage at FELP, if there was ever a time that leverage should have killed this company "ZINC style," it was back in April.  I can't imagine a worse time to have debt issues.  But I like the leverage here because it will work just as well in the other direction if just one or two things work out better than expected.  Not to mention the 2017 debt is structured in a way that will prevent a catastrophe.  Plus a couple years of mandatory debt paydown.  Leverage + commodity doesn't always have to = uninvestable.  And you get paid to hedge out a lot of risk if you can purchase the PIK debt. 

 

To answer Aqul, there's only $120 million of PIK outstanding so you have to contact holders with an offer.  No one has been willing to sell them to me yet.  So I'm just waiting for someone I haven't contacted to put out any kind of pricing.

[awindenberger]

You can suck up some amount of volatility once you end up with this kind of problem because the net return for being patient an extra year is fairly substantial.  In addition to the returns that FELP is likely to provide as it rolls into a more favorable tax situation.

 

 

What are you expecting in regards to their tax situation Picasso?

 

Also, how quickly to you expect the dividend to be reinstated? That of course will be an exciting day.

[Picasso]

Hmm....

 

First, he said, Murray Energy had to act to shore up the financing of Foresight Energy LP after Murray's purchase of a large stake in the partnership. Shortly after Murray Energy spent $1.40 billion for Foresight, the lenders accelerated about $600 million in debt and a Delaware court issued an opinion supporting them.

 

Murray says now Foresight's debt is shored up and Murray Energy is operating the mines and marketing the coal. Murray said he hopes in coming months his company "will have a path to control Foresight Energy and bring it under Murray Energy, a private corporation."

 

https://t.co/TSDLJuywwM

[Picasso]

You can suck up some amount of volatility once you end up with this kind of problem because the net return for being patient an extra year is fairly substantial.  In addition to the returns that FELP is likely to provide as it rolls into a more favorable tax situation.

 

 

What are you expecting in regards to their tax situation Picasso?

 

Also, how quickly to you expect the dividend to be reinstated? That of course will be an exciting day.

 

Sorry, I meant that the fundamentals for FELP should get better as my position starts to move into long-term cap gains treatment. 

 

It all depends how Murray addresses the new cap structure at FELP.  It's beginning to sound like he wants to take it private.

[sampr01]

Hi Picasso,

 

Wow. May be he mean that  "acquire an additional 46% of the interest for $25mm over the next five years, and 50% of the limited partner interest" to reach 80% ownership. That way he can control the company?. 

 

"Murray said he hopes in coming months his company "will have a path to control Foresight Energy and bring it under Murray Energy, a private corporation".

 

 

 

[Picasso]

I think that was a given since the irony of this whole thing is that he's never had control over FELP despite being put back on a ton of debt over a change of control.  Completing the Cline purchase to get control is just part of this whole debt exchange and redemption.  But bringing it under Murray in the coming months is pretty strong language. 

[heth247]

You were probably right. Now that 2021 notes have been refied, Murray can exercise his option to acquire addition 46% of FEGP for $25mm.

 

Picasso, what is the implication of Murray taking full control of the GP? Are we LPs (including Cline) all at the mercy of him? 

 

Please correct me if I am wrong. I think Murray's economic interest can be achieved in three ways:

1. Through the distribution from the sub units (still years away).

2. Through the IDRs for GP (also years away).

3. Through "drop-down" of assets from MEC to FELP. For this one, once he has full control of GP, what can be blocking him from dropping down an asset to FELP at a crazy inflated price?

 

Thanks.

 

Hi Picasso,

 

Wow. May be he mean that  "acquire an additional 46% of the interest for $25mm over the next five years, and 50% of the limited partner interest" to reach 80% ownership. That way he can control the company?. 

 

"Murray said he hopes in coming months his company "will have a path to control Foresight Energy and bring it under Murray Energy, a private corporation".

[awindenberger]

Coal Miner CEO Calls Tesla Fraud

 

When I saw the headline I was almost certain it was Murray. Guess if I was right or not...

 

 

[Picasso]

heth,

 

Cline can choose to participate in the PIK refi.  If FELP is still at $4, he'll probably choose to take 60% of whatever is issued to redeem the PIK.  So Murray trying to screw the common units ahead of the refi would be unusual because I think he would want to issue as few new units as possible to Cline or others.  If he wanted to heavily dilute or could care less about the LP units by stuffing drop downs, he would have already diluted instead of this complicated bond swap.  If FELP is at $10, maybe Cline won't want to participate so Murray could take all the new equity or something.  It would probably benefit Murray to see the common units realize some value in that situation, but stranger things have been done.

 

They also formed that special committee as part of the transaction, partly because Cline is probably worried about that risk since Murray is more distressed compared to when they first struck the deal.

 

Synergy and Conflicts Committee

 

The board of directors of FELP’s general partner (the “GP Board”) has created a Synergy and Conflicts Committee (the “Synergy and Conflicts Committee”) comprised of the three independent directors of the GP Board (Messrs. Brian D. Sullivan, G. Nicholas Casey and Daniel S. Hermann) which will be responsible for reviewing, approving, or denying approval of: (i) any unbudgeted affiliate or synergy transactions involving the Partnership, in each case having a value in excess of $5.0 million; and (ii) any transaction which would, if consummated, provide financing for or be materially related to the redemption of the Exchangeable PIK Notes, and will be delegated all rights, power and authority of the GP Board in respect thereof. The Synergy and Conflicts Committee shall also serve as the general conflicts committee of the GP Board. In respect of the matters over which the Synergy and Conflicts Committee has been delegated authority under clause (i) and (ii) of the first sentence of this paragraph, the Synergy and Conflicts Committee shall: (i) have the right to retain independent financial and legal advisors of its own choosing; (ii) be empowered to act on behalf of the Partnership independently of any affiliates or interested directors; and (iii) have the power to enforce the decision made by it (including any decision to reject any proposed transaction with any affiliate of the Partnership).

 

Overall, I'm not too worried about Murray doing crazy drop downs. 

[heth247]

Thanks, Picasso,  btw, are you able to get any PIKs?  I saw Murray's notes rose to 65 last Friday.

[valcont]

Just in case anyone is wondering about the run up today.

 

http://www.mining.com/coking-coal-iron-ore-prices-resume-surge/

 

Gotta love the communists in a commodity play.

[wachtwoord]

The rally was triggered by Beijing’s decision to limit coal mines' operating days to 276 or fewer a year from 330 before as it seeks to restructure the industry.

 

Silly communists.

[valcont]

"And we look forward to supporting them and their export needs throughout Convent Marine Terminal. We'll have some more to say about that later, because what we've also seen is pretty significant uptick in price of export coals and the expectation of profitability of export coals for our customers, going forward."

"At Coal Logistics, the $4.3 million contribution from our Convent facility was comparable to Q3 2015, and KRT and Lake Terminal were impacted this quarter by lower throughput. Volumes across the terminals were below expectations, but we expect a sequential improvement in volumes in the fourth quarter."

"Let's take a closer look at the increased profitability of those thermal coal exports on slide nine. Low cost U.S. producers still turn a profit when API2 prices were in the mid to high 50s. And with the benchmark in the mid 70s, the mine netbacks are meaningfully higher. We regularly update our estimate of export profitability. And based on our assumptions, our CMT customers are solidly profitable at current delivery prices. While this is an encouraging sign for the thermal exports coming through CMT, we are also looking at incremental business that I will cover on the next slide."

Comments from the SXCP's CEO in yesterday's conference call. So FELP was able to get the rebate should the API2 move down in the 50s. API 2 is in the 70s now and they are seeing higher coal volume at the Convent in the 4th quarter. This is highly accretive to FELP.

 

[awindenberger]

Is there a link to the conference call?

 

EDIT: I answered my question. Didn't realize Q3 call was this early for SXCP.

[Picasso]

"And we look forward to supporting them and their export needs throughout Convent Marine Terminal. We'll have some more to say about that later, because what we've also seen is pretty significant uptick in price of export coals and the expectation of profitability of export coals for our customers, going forward."

"At Coal Logistics, the $4.3 million contribution from our Convent facility was comparable to Q3 2015, and KRT and Lake Terminal were impacted this quarter by lower throughput. Volumes across the terminals were below expectations, but we expect a sequential improvement in volumes in the fourth quarter."

"Let's take a closer look at the increased profitability of those thermal coal exports on slide nine. Low cost U.S. producers still turn a profit when API2 prices were in the mid to high 50s. And with the benchmark in the mid 70s, the mine netbacks are meaningfully higher. We regularly update our estimate of export profitability. And based on our assumptions, our CMT customers are solidly profitable at current delivery prices. While this is an encouraging sign for the thermal exports coming through CMT, we are also looking at incremental business that I will cover on the next slide."

Comments from the SXCP's CEO in yesterday's conference call. So FELP was able to get the rebate should the API2 move down in the 50s. API 2 is in the 70s now and they are seeing higher coal volume at the Convent in the 4th quarter. This is highly accretive to FELP.

 

Between what's happened with API 2 and the subordinated equity structure, it provides a lot of downside support to the equity where I think it would be really difficult to get screwed on a PIK refi.  Probably shouldn't be trading for around the unpaid distributions given that fundamental improvement.

 

The MSHA announced 3Q production numbers from FELP which are in line with last quarter and the 3Q in 2015.  So you aren't seeing these big production drops that some earlier on the thread were talking about.  Operating leverage basically got as bad as it was going to get in the 1Q of 2016.

 

And just for some comparisons.  The 1Y forward on API 2 was $47 this time in 2015.  Today it's $70.  A year ago FELP was at $8 versus $4.50 today.  FELP is highly geared towards export prices because all of it is done with incremental tons on a low variable cost.  So this is obviously positive operating leverage in the other direction.  I believe it's somewhere around $10/ton on about $40 netbacks using the 1Y forward.  Spot is $10 higher. 

 

Also, spot ILB pricing has started moving up (although not by much) but is higher than it was this time in 2015 when FELP was much higher.  This is partly because nat gas is also about 50% higher than this time last year.  Plus European utilities are having a lot of issues with their nuclear reactors which should support API 2 prices going into the PIK refi.

 

Not to mention the general sentiment towards coal has changed a lot over the last year.  Companies are exiting bankruptcy and (gasp) providing investors with securities that are actually moving up in price and creating positive free cash flow.  For example see ARCH or CNTE.  I think investors are probably figuring out that coal isn't totally dead.

 

It's unclear what is going on with Hillsboro.  But given the rest of the assets can support FELP as it currently stands (which still has it worth a lot more than the current unit price) then that's become a weird hidden asset.  Any kind of clarity on that asset will be important and it's not something an investor is paying for at this point.

 

Some reasons why it's still cheap:

 

1) Owners get the joy of paying taxes on income they won't receive (since it's a partnership and distributions are being withheld) 

2) Market is probably nervous about the upcoming PIK refi

3) At least one large sell-side firm has dropped coverage coming out of the refi

4) This thing is very illiquid, hard to get any large size for the bulk of fund managers.  If something goes wrong on a big position here, you're trapped.  Float is tiny as heck.

 

That said, I'm comfortable with all those things.  Others might not be but hey that's what makes a market.  If someone has shares they want to unload in a block trade feel free to send me a message.  As long as you're not Accipiter.  I'm not that rich.

[valcont]

Between what's happened with API 2 and the subordinated equity structure, it provides a lot of downside support to the equity where I think it would be really difficult to get screwed on a PIK refi.  Probably shouldn't be trading for around the unpaid distributions given that fundamental improvement.

 

I agree. The only way to screw the unit holders is if Cline and Murray get into some kind of agreement to sell FELP to Murray for cheap. Or Murray gives up on FELP and start dumping bad assets on it wiping the equity and the debt.

 

As a wise man once said  "A mine is just a hole in the ground with a liar on the top" . Gotta be careful.

 

 

[Picasso]

Well both of those are extremely unlikely.  It's part of the reason this restructuring took so long.  Cline made sure he wasn't going to get screwed by going in for the bond tender. 

 

Plus why would Cline sell FELP to Murray on the cheap after coming in to help with the bond tender?  By my estimates FELP can do around $200 million of free cash flow next year because of this API 2 rebound.  That means it probably trades for 3x earnings even including all the Murray subs.  Cline isn't likely to sell at this price.

 

And Murray can't just start dumping bad assets on FELP because of the conflict committee that was put in place as part of the Cline tender. 

 

Not that bad things can't happen but I think getting screwed for those reasons isn't likely to be an outcome here.  Maybe another mine catches fire or something.  Or China decides to kill this met coal rally and investors assume FELP will be impacted.  The winter doesn't look like it will be that cold but we'll see what happens to coal inventories.

[valcont]

Well both of those are extremely unlikely.  It's part of the reason this restructuring took so long.  Cline made sure he wasn't going to get screwed by going in for the bond tender. 

 

Plus why would Cline sell FELP to Murray on the cheap after coming in to help with the bond tender?  By my estimates FELP can do around $200 million of free cash flow next year because of this API 2 rebound.  That means it probably trades for 3x earnings even including all the Murray subs.  Cline isn't likely to sell at this price.

 

And Murray can't just start dumping bad assets on FELP because of the conflict committee that was put in place as part of the Cline tender. 

 

Not that bad things can't happen but I think getting screwed for those reasons isn't likely to be an outcome here.  Maybe another mine catches fire or something.  Or China decides to kill this met coal rally and investors assume FELP will be impacted.  The winter doesn't look like it will be that cold but we'll see what happens to coal inventories.

I was just trying to think of the scenarios. I agree they are unlikely. Murray is an old school guy and will not risk his reputation by screwing the unit holders.

 

As for the China killing the rally. The only thing they hate more than accepting a  bad policy outcome is to go back on the policy. The likelier result will be a slowdown on the implementation that may check further price rally. I do think that will be a much better outcome. Lots of coal companies left for dead are starting to ramp up in Australia. A 20-30% decline in the coal prices will slow it down considerably. Either way FELP is still a "restructuring didn't bring down the company" story.  Coal price rally is an icing on the cake.

 

 

 

 

 

[awindenberger]

At this point, it seems like it would be nice for FELP to lock in pricing on a decent portion of their planned 2017 production so they can set themselves up for a strong 2017.

[Picasso]

At this point, it seems like it would be nice for FELP to lock in pricing on a decent portion of their planned 2017 production so they can set themselves up for a strong 2017.

 

Not to mention the SXCP export terminal will have capacity for up to 15 million tons in 2017. 

[awindenberger]

At this point, it seems like it would be nice for FELP to lock in pricing on a decent portion of their planned 2017 production so they can set themselves up for a strong 2017.

 

Not to mention the SXCP export terminal will have capacity for up to 15 million tons in 2017.

 

If they could lock in $20/ton profits on say 10-12Mil tons (not sure how much capacity Murray is responsible for), that would potentially mean even more than $200M FCF in 2017.

[valcont]

If they could lock in $20/ton profits on say 10-12Mil tons (not sure how much capacity Murray is responsible for), that would potentially mean even more than $200M FCF in 2017.

 

In the case of commodities, market usually discounts forward prices but FELP's case is interesting. There is a big overhang on the stock due to the PIK refinancing next year. If that path gets some clarity because of higher pricing hedges, FELP will be repriced close to where ARLP is since the debt ratios will be lot better due to higher earnings.  From there on , its a commodity stock.

 

What really surprises me is that at today's prices , you are locking in $2.00 of distributions before Murray can assume control.

[valcont]

What a jump today!! Looks like market is figuring this one out.