FELP - Foresight Energy

[indirect]

Deer run mine is now closed. How will this affect CF in your models?

I think this action was part cost cutting and part hardball with bondholders.

 

[Picasso]

In the short run it's pushing costs from $22/23 to $28/ton. That leaves them with almost no free cash flow in the short-term. The timing on this fire is kind of funny because of the bondholder dispute. I'd like to think it makes it easier to settle but who really knows. Foresight should have settled this before it got to that court decision.

[RadMan24]

In the short run it's pushing costs from $22/23 to $28/ton. That leaves them with almost no free cash flow in the short-term. The timing on this fire is kind of funny because of the bondholder dispute. I'd like to think it makes it easier to settle but who really knows. Foresight should have settled this before it got to that court decision.

 

...have they not consistently had troubles with that mine? It is not one that I was surprised to be shut down, nor should it be a surprise costs go up. But up $5 a ton? When the debt load is high and increasing, revenues dropping, it just doesn't work out well often.

[Picasso]

Sorry it shouldn't be up by $5/ton.  I went back through the last time they had a fire at Deer Run and even though it was only a month of downtime versus several months so far, it didn't have a material impact on the costs per ton.  They already booked about 20 million tons for 2016.  Part of the reason costs were so high in 4Q was that production was down big from the Deer Run fire, but it's getting replaced by another mine so we should see that shift by the time they announce earnings; if they make it to next earnings.  If this Deer Run things never gets fixed then I think you're looking at closer to $23-25.  Maybe $10 EBITDA margins per ton in that environment?  $200 million EBITDA minus $75 million for capex leaves $125 million for the interest payments and equity holders.  Not a ton of wiggle room but this is the point where there is a lot of operating and financial leverage.  Costs are about as high as you'll ever get, ILB coal pricing is at or below average production costs (based on what I see from numbers disclosed from other ILB producers), and the interest payments are eating up most of the free cash. 

 

Whereas in the bearish scenario above you're looking at only $8 million of DCF, if they can get 25 million tons out @ $15 margins, you suddenly have $183 million of DCF again.  I really don't think 25 million tons at $15 margins is that crazy of an assumption for these guys. 

 

If there was no change of control default nonsense going on and I looked at the units @ $1 and tried to gauge the probable future earnings potential, it looks massive.  Several multiples of the current market cap.  So these trough conditions suck, especially because of the debt expense, but the equity is insanely geared to any positive turn and that's usually when you buy these stocks.  It's generally a terrible idea to buy any commodity producer when they're earning super high returns.  It might not mean this will turn out to be a good idea but more often than not this situation works well over time.  It helps that you have a bunch of stakeholders who either need this to work out or have substantial financial incentives to make it work.

[awindenberger]

I wonder why the spike up today; no news yet so I wonder if we will see a positive news release after the close.

[bigbadwolf]

Side business in Canada: Kameron Collieries

 

Is Cline focusing his efforts on country that is more friendly towards coal - due to high unemployment in the energy industry?  It seems more politically acceptable right now in Canada. 

 

[Picasso]

My best guess is he sees an opportunity to recreate in another geography what he built at Foresight.  He also bought these coal assets in Canada fairly cheap and almost like a long-term call option.  Just looking at some of the various moves since 2010, he is a decent investor in the space.  Which is sort of weird because the bondholders painted a picture of someone who wanted to get away from the coal business. 

 

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.

[RadMan24]

Side business in Canada: Kameron Collieries

 

Is Cline focusing his efforts on country that is more friendly towards coal - due to high unemployment in the energy industry?  It seems more politically acceptable right now in Canada.

 

Did Canada just not release carbon controls that are designed to eliminate the use of coal? The Coal industry is no longer as valuable as it once was, at this current time to say the least. Assuming and when it does become more valuable is anyone's guess. Cline divested a good chunk of his assets at the time of the IPO, while Murray is determined to be the last man standing, Cline's interests may have diverged. Foresight was brought on the market highly levered, we've seen the result of that so far.

 

Even a low cost producer is not as strong as being connected to a power plant, like many of WLB's coal mines are, or mine mouths. If you have an advanced coal plant connected to your coal mine, regardless of what happens, as long as you have cost of capital rates, you should survive the brutality of this storm. Foresight relies heavily on transportation to sell more tons and to reach full capacity. In a normal market, this can work well given its low cost structure. In a declining market, it presents various risks that may take longer than normal to revert to sustainable price and volume levels.

 

I understand that a trade or bet can be made that either Cline or Murray will put more cash to work to settle the covenant breach and CIC event, however, beyond that fix, the upside requires a lot of things to go right to make it work out like a multi bagger. Any restructuring of debt could also have implications on the unit holders, similar to what's going on in LINN Energy I would presume as well.

 

But I could be wrong :)

[Picasso]

Interesting points.

 

I'm sort of on the fence about what is better.  1) Connected coal mines at higher costs, or 2) Low cost mines with low transportation costs.  You can make the argument that #1 may not have terminal value if the plant shuts down.  There are some extra risks there to having a stranded asset.  Dealing with that on SunCoke contracts right now.  If the costs are low enough then #2 is viable long-term regardless of connected plants.  But to your point, leverage is an issue.

 

The LINN debt restructuring is a lot different than Foresight.  Those bonds were at $3 and yielding nearly 300%.  Restructuring out of court at less than par hits the LP's with big tax bills.  Foresight bondholders are simply exercising their rights to a change of control after Murray backed out of paying a $48 million waiver by restructuring the terms of the deal.  A settlement will likely be close to par or some 15 point fee, neither of which will hit the LP's with the kind of massive tax bill the LINN guys are getting. 

[Green King]

Interesting points.

 

I'm sort of on the fence about what is better.  1) Connected coal mines at higher costs, or 2) Low cost mines with low transportation costs.  You can make the argument that #1 may not have terminal value if the plant shuts down.  There are some extra risks there to having a stranded asset.  Dealing with that on SunCoke contracts right now.  If the costs are low enough then #2 is viable long-term regardless of connected plants.  But to your point, leverage is an issue.

 

The LINN debt restructuring is a lot different than Foresight.  Those bonds were at $3 and yielding nearly 300%.  Restructuring out of court at less than par hits the LP's with big tax bills.  Foresight bondholders are simply exercising their rights to a change of control after Murray backed out of paying a $48 million waiver by restructuring the terms of the deal.  A settlement will likely be close to par or some 15 point fee, neither of which will hit the LP's with the kind of massive tax bill the LINN guys are getting.

 

Once this problem is solved. What is your comparable for this ? IE a comparable coal stock without this type debt problems and similar cost structure.

[Picasso]

There's nothing very comparable here.  ARLP or CNXC might be close, but they're either have very little debt or no debt and a higher cost structure or tons are falling a lot faster. 

 

I think it's easiest to look at it from the point of view of Murray Energy.  FELP generated $159 million of levered distributable cash flow in 2015.  Without interest expense it would be $276 million.  The market cap is currently $153 million and 2015 wasn't a walk in the park considering that their lowest cost mine has been idled for a year and ILB prices collapsed halfway through. 

 

If you look at the DCF yield on CNXC it's about 20%.  And their fundamental picture is seemingly worse than FELP.  But they don't have any debt.  All things considered I think you can see a 20% yield on FELP post settlement.  Especially since Murray has the bulk of the IDR's that are far and away from the high splits, they need to pay out $2 of distributions to convert their subordinated units, and it's probably within a few years of seeing a bottom of this bad coal cycle.  At 20% you'll be able to recover most of your investment within a few years and get a cheap option on any positive turn. 

 

$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.

[Picasso]

Something else to consider are the Murray Energy bonds.  It hurts that Murray paid such a high price for FELP but the bonds they financed it with have gone from $100 to $14.  They have actually recovered a bit from $10.

 

The current market value of those bonds is only $168 million versus $1.4 billion at issue.  If Murray can start pulling out distributions from FELP they'll be in a good position to repurchase a lot of that debt and effectively reduce their FELP purchase price.  That's better than massively diluting and killing off their FELP IDR's.  I bet a lot of bondholders would take $25 right now.  Reducing leverage at the Murray sponsor level will put everyone in a better position.

 

But they may have no choice but to let Cline dictate his terms and come in with more equity than they want.  Anyway, that's just another piece to this puzzle.

[Green King]

I was unable to find current production numbers for the Illinois basin does anyone have that ?

 

TIA

[Picasso]

I only have figures up to December of 2015.  But the EIA put it in the "Interior" classification if you look at this interactive chart.

 

https://www.eia.gov/coal/production/weekly/

 

Average was 11 million tons per month in the ILB for 2015.  If you sort of take a trend of the average for 2016 so far, it's running 11 million monthly tons *total* between various interior production and the ILB.  It's fallen off a cliff.

[Picasso]

I also quickly took a 2014 running tally for the total interior (ILB + Texas etc) and it was about 73% ILB production.  So maybe take the interior figures and say around 70-80% of that is ILB.  In which case 2016 is shaping out to be around 96 million tons of production.  About a 25% drop?

[Picasso]

Foresight Said to Be Close to Creditor Deal to Avert Bankruptcy

 

(Bloomberg) --

Struggling U.S. coal miner Foresight Energy LP and a group of bondholders are closing in on a deal in which billionaire founder Chris Cline would inject cash to repay the creditors, according to people with knowledge of the matter.

 

The company, which faces a deadline Tuesday for resolving the dispute with bondholders who claim they are owed more than $600 million, needs an agreement to help stave off bankruptcy amid the worst coal downturn in decades.

 

Under the deal being discussed, Cline would buy some or all of that debt, said the people, who asked not to be named because the discussions are private. Cline may also invest capital in Foresight’s part-owner Murray Energy Corp., the people said.

 

A group of the miner’s senior secured debt holders are seeking a consent fee to agree to any terms, the people said. The latest discussions between Foresight and its bondholders are still evolving and may fail, the people said.

 

Jason Margherio, a spokesman for Foresight, declined to comment.

 

Demanding Premium

 

Foresight’s dispute with bondholders led by DDJ Capital Management and BlueMountain Capital Management began after Murray bought a 50 percent stake in the company a year ago. The creditors argue that the acquisition amounted to a change of control, which, under Foresight’s lending contracts, would require the company to repay, at a premium, its $600 million of 7.875 percent senior unsecured notes maturing in August 2021.

 

Murray and Foresight said in a press release last April that no change in control would occur from the transaction. But in December, a Delaware judge ruled that it had and ordered Foresight to negotiate with bondholders.

 

Foresight has been trying to restructure its debt outside of court as it works to avert bankruptcy after defaulting on several fronts. Mining giants including Alpha Natural Resources Inc. and Arch Coal Inc. have already filed for bankruptcy as coal prices plunged 75 percent since 2011 amid mounting environmental regulations, weakening demand abroad and cheap natural gas.

[Green King]

Congrats on predicting the outcome of this this event.  :D

Thanks for the answers. kudos for having the balls to invest in these type of situations. ;D

[RadMan24]

I'll second that. Definitely still watching this with interest.

[Patmo]

Isn't the coal space just lovely? This would be my 4th double in a month in coal alone... Picasso you suggest the best trades, I love it. Simple, no nonsense stuff. Let's make millions baby

[awindenberger]

Its def interesting to see that the stock popped 50% without even confirmation of the deal being complete. I'm curious to see the final deal.

[Guest roark33]

Isn't the coal space just lovely? This would be my 4th double in a month in coal alone... Picasso you suggest the best trades, I love it. Simple, no nonsense stuff. Let's make millions baby

 

Patmo, a little curious how you got a double out of this one:)

[Patmo]

Isn't the coal space just lovely? This would be my 4th double in a month in coal alone... Picasso you suggest the best trades, I love it. Simple, no nonsense stuff. Let's make millions baby

 

Patmo, a little curious how you got a double out of this one:)

 

Sorry, I wrote my message a bit unclearly, I said "would be my 4th double" and I meant that it would be if it does end up a double. All 3 others are confirmed - TCK.B, SXC, CNX

[Picasso]

Isn't the coal space just lovely? This would be my 4th double in a month in coal alone... Picasso you suggest the best trades, I love it. Simple, no nonsense stuff. Let's make millions baby

 

We're going to have to take our coal winnings and start lobbying against coal regulations.  Poison the air for our grandchildren and their children's children.  Meanwhile we're rocking McLaren P1's while blasting Butterfly by Crazytown. 

 

Anyone check the short borrow today?  I'm curious if it's still in the 90% area.  Fidelity seems like the only seller of size but after today's volume they're probably out, day trading volume aside.  That would hopefully make this one of those stocks that simply grinds higher because you've run out of dedicated selling by a large holder. 

 

Stock still seems quite undervalued at 1.7x 2015 DCF, even after today's rally.  The key for me was that Cline is looking to take a stake in the sponsor Murray, which if true puts Foresight in a much better position with dilution happening mostly on the sponsor level.  Even if the senior lenders want 5 pts or something, that's minimal dilution and they can probably pay it with cash on hand.

 

What's also key here is that Murray owns most of the IDR's.  By Cline looking to take a Murray stake he doesn't need to dilute Foresight at all to make a lot of money.  So in exchange for buying up most or all of the Foresight notes, he's taking a bigger stake in Foresight by simply taking a stake in Murray.  Which also means they're likely to find a way to get the distributions paid out, convert the subordinated shares, get FELP stock up, do drop downs, collect on the IDR's, etc.  If it's true that Cline is going to be part owner of Murray then it's a pretty big deal.

 

I bought a lot more today so hopefully the Bloomberg report is close to reality.  Even if it isn't, I don't think a permanent loss of capital is likely at $1.80.  And it does indicate that these guys really want to be the last coal guys standing, so there's the potential that in five or ten years it can be a complete home run.

 

And since FELP and Murray make up 25% of SXCP EBITDA, I've bought up even more of SXCP as well.  The market is so weird about valuing this complex.... SXC is over $468 million but if FELP files their free cash flow goes to zero with the SXCP dividend cut.  And SXC trades for 2x the value of their SXCP stake.  You can just buy some SXC puts and load up on FELP if you were worried about them filing. 

[Guest roark33]

Moral of the story: If Picasso says a toad* is a princess, pucker up....

 

 

 

 

 

*Potential exception being class B/C mall operators....

[Green King]

do you mind sharing your percentage of allocation ?