FELP - Foresight Energy

[Picasso]

After what I bought today it makes up half my PA.  I was (still am) willing to take about a 35% hit if it goes tits up.  Not that it rationalizes a super large position, but even if it went to zero I'd still be up double digits in 2016 (so far) because of some other holdings.  I tend to press my bets hard when I think it has a very high probability of working out.  If anything the news today is a sign to buy more. 

 

And this is with my money, not OPM.  I probably shouldn't say what # top shareholder I am...

[bonkers]

Picasso,

 

wasn't it you talking about risk management some time ago on a different thread? I'm not saying that you're wrong on this, but how do you combine that with such a position in a highly levered commodity company in default, based on unconfirmed information from a Bloomberg article?

 

Granted, Bloomberg must receive its info from the parties involved, but there are many involved, and it might just be their internal game to put pressure on each other. I suppose the discussions may still fail on some fool resisting, but I don't know how these processes go.

 

So far the only facts I see from 8-K is that resolution has again been postponed, this time to Friday, 15th.

[hswoon]

If I understand this bet correctly...

 

The risk involved on this trade is whether or not Cline provides to bailout to equity holders by purchasing the bonds due. The speculation is that Cline would chip in his own net worth, and that bondholders would negotiate the principal payment with Cline instead of pushing FELP into BK; for various reasons stated in this post. The bet is not entirely weighted on the Bloomberg article. The article (that parties were close to finishing negotiations) just confirms the original idea that FELP would not be pushed in BK, and that parties would be willing to negotiate. It should be noted that the forbearance extensions were 1wk each for a month, with the recent extension being a few days (from 12th to 15th), confirming the speculations in the article that parties were close to agreement. Therefore this new information to Picasso means the probably of default went down even further.

 

As for operational/industry factors debt/coal and what not that only matters if you intend on holding the position past the events in the near future. The play is that the event (not BK or BK) will work out as speculated, the market will pop, 50%-200%, whatever, and you also have the option of a rebound in the coal industry (if you wish to long that by holding the position longer). But these issues are not highly relevant in the short term if you are making the event driven play. You're either going bust if Cline doesn't bail out, or making a few times your money if FELP survives (this is also another assumption).

 

tl;dr neither parties have interest in a BK, Cline personally will negotiate out of BK, market will react to event. Bloomberg article confirmed Picasso's original idea.

 

[Picasso]

That's right hswoon.  If the extension was for another week then I would not have bought more but simply waited to see what would happen.

 

Risk management is everything.  I'm fine risking a little over 30% on this "trade."  If it goes tits up I'll just walk away from it and move on to other ideas and probably still have a good year. 

 

Also, just think of where the stock was at.  About 1x 2015 DCF.  During some of the worst coal conditions you can imagine.  Everyone is going bankrupt, production is falling off a cliff, and these guys are still very profitable.  Now add in that it's at 1x earnings because investors think it will file for bankruptcy over a bond dispute that could have been avoided for only $48 million.  If you know the personalities of Cline or Murray, why would they simply walk away and destroy billions over $48 million?  That doesn't make any sense.  And they have the capital and incentives to do the right thing for the FELP unit holders. 

 

I don't see a lot of opportunities like this, so I'll naturally buy a lot of it when it comes up.  It's a well calculated bet from a sizing standpoint and when I'm having a good year I always push harder into my best conviction trades.  It's harder to do that when you're flat or down because you can't really risk 30-50% on a trade.  I'm sort of reminded of a Druckenmiller quote from his time at the Quantum Fund but I need to go dig it up.

[Picasso]

In terms of my previous risk management comments on say ZINC or whatever it was (VRX?), at a certain point they lacked any reasonable upside and were exposed to a lot of risk.  Instead of cutting a large position a lot of investors just decided to ride it out and see what happens.  You need a lot of really good conditions to hold onto a large position and I don't see those conditions where a lot of guys on this board concentrate. 

 

Part of that is the psychology aspect.  When a large position moves against you, there is some rationalization that starts happening and you look at the loss and decide the damage is done and you'll just wait a bit.  If you don't have the right temperament, making a critical decision with concentration is dangerous.  That's either something you have or lack. 

 

I'm also not thinking too much about the upside here.  It's hard to lose buying at 1x near trough earnings if you think there's a high probability of some settlement coming in a couple days.

[bonkers]

There may be upside, but I just think about the downside. It's not about the valuation of last year's cash flow.

 

I'm just thinking the legal process, that does not care about fundamentals, and definitely not about valuations. I would hate to lose a large position due to some technicality in default / reorganization process, which to me is invisible.

 

Hence perhaps only a smaller position...

[sampr01]

Thanks Picasso for the Idea. I just want to remind everyone that "when he recommended FELP on March 15th, price was between 1.62-1.52". Now you have more information than before. I think its a good idea to buy now. :)

[Picasso]

There may be upside, but I just think about the downside. It's not about the valuation of last year's cash flow.

 

I'm just thinking the legal process, that does not care about fundamentals, and definitely not about valuations. I would hate to lose a large position due to some technicality in default / reorganization process, which to me is invisible.

 

Hence perhaps only a smaller position...

 

2015 cash flow isn't too far from a trough earnings picture.  Like I mentioned elsewhere in the thread it makes more sense to value it on a full cycle basis and you're not getting peak cycle earnings here.

 

I totally get the rest of your sentiment, but I'd say 9 times out of 10 this situation pans out.  I.e., every party benefits in settlement, limited dilution, lots of extensions indicating they're working through it, all the other coal guys are going bust, and I could go on.  Added up together you have really good odds.  But for most investors yeah don't concentrate in this idea.  The "stress" of owning such a large position doesn't really impair my thinking or bother me.  If it doesn't work out I'm not too worried about finding other good investments. 

[Picasso]

Now that it's down to the wire, I think we can officially reference Lose Yourself.  I was hoping Jurgis would do it for me but he's apparently out of town.

 

 

By the way, which one of you jokers altered Bob Murray's wiki page to make him out to be Batman?

 

https://en.wikipedia.org/wiki/Robert_E._Murray

 

Robert E. Murray was born in 1940. His father was paralyzed in a mining accident when Murray was 9 years old. As a miner himself, Murray experienced two accidents on the job. Meanwhile, Murray lied about his age so he could work in a coal mine at the age of 16 and provide for his family. Murray says that he suffered through several mining accidents, including on one occasion being hit in the head with an 18-foot (5.5 m) beam made of steel.[2] Murray says he has one scar running from his head down his back from a separate accident and at one time was trapped in a dark mine for 12 hours before being rescued.[2] After his father died tragically, his mother was then shot so he tried becoming a vigilante but that didn't work out.

[Patmo]

I can do it for him

 

Mom's spaghetti

[mountboney]

If Cline were to walk he'd face a Murray lawsuit for his part in botching the change of control deal. Merit or not, why deal with that plus the losses when you don't have to.  Hard to see how this doesn't work out but of course anything can happen.

[PullTheTrigger]

Fascinating to watch this play out in slow motion week after week and now today.

 

Assuming this doesn't go belly up today, here's another article about the demise of the coal industry:

 

http://www.slate.com/articles/business/the_juice/2016/04/the_u_k_is_quitting_coal_poorer_countries_aren_t.html

 

According to this article, as of January, coal is still 31% of electricity production. It's not going to zero overnight, so some companies will continue to produce. Why not FELP?

 

Good luck to all those taking the bet on FELP.

[Picasso]

This was another interesting article from last year, including comments from FELP and CLD.

 

http://www.bloomberg.com/news/articles/2015-08-02/coal-left-fighting-over-america-s-last-plants-as-rules-mount

 

Details of the plan show deep emissions cuts will be required, by curbing the country’s use of coal and natural gas. By 2030, coal’s share of power generation will have fallen to 27 percent, the Environmental Protection Agency said. That’d be down from 33 percent for coal in May.

[bigbadwolf]

Another extension...

[PullTheTrigger]

So Picasso - any more thoughts here with another week extension?

 

Who's in the driver's seat?

 

Or is the resolution so complicated that they just need more time to iron out all the details?

 

Still interesting to watch this play out.

[Guest roark33]

Picasso, I think you need to bring more seriousness to this topic.  I shifted my grandmother's and all of her assisted living, denture-wearing friends into FELP on Wednesday.  If this thing doesn't work out, I am going to have to outrun a lot of motorized scooters......

[Green King]

It's a bet on probability nothing more. 

[alertmeipp]

what's the upside?

[Picasso]

Hmm, interesting.  It's a bit weird that it went from weekly extensions to a couple days and back to a week.  My question is what the sticking points might be at this point.

 

1) The unsecured notes aren't too complicated to cure.  But each point is a $6 million cost and what are the legal fees looking like here?  I suppose tendering at $95 could save Cline $36 million?  It's possible that dragging this on justifies the added expenses of taking it down into double overtime. Murray and Cline already own 85% of the equity so they probably don't care if FELP goes up in the next week or month.  Not like they're sellers.  And Cline coming into the notes is like he simply provided seller financing to Murray to begin with, and he's done that before with SXCP.  Plus he'd be fulcrum on some 8% notes and I'd think the market would like that.  Easier to survive the cycle when your only unsecured lender is not going to play super hardball when they also own 85% of the equity.

 

2) Do the senior lenders want too much from FELP?  I can't imagine the senior lenders want a fee that they don't currently have on hand.  This has dragged on for so long that they're building up cash on the balance sheet, especially since they stopped paying on the notes.  If Cline tenders at $101, he'll have notes that are still holding accrued interest of $24 million.  Unless the note holders want him to tender at $106 and he simply gets that accrued back from FELP at some point. 

 

If you add back in the USN interest expense in 2015 DCF, there was $184 million of cash coming in.  Contracted volume is down 10% for 2016 versus 2015.  Not catastrophic, so I'd have to think they are building up enough cash to easily pay that fee.  The longer this drags on the less potential dilution comes into play.  They burned a couple million in the 4Q so maybe that's part of what's making this take some time.  The $300 million in senior lenders look pretty protected without $24 million going out the door in interest payments to the note holders in March.  Really no reason to accelerate there.  Just a question of what fee they want...

 

3) Maybe Cline and Murray are having a hard time coming to an agreement on how much of Murray Cline will own.  He is de facto coming into more FELP by buying into Murray and doing it pretty cheap.  Or maybe there's something going on with the senior lender level at Murray that I'm missing and it's not working at the valuation Cline is going into Murray.  It could be taking some time for Cline and Murray to come to an agreement of what a sponsor level capital injection will look like.

 

Some positives here are that everyone appears willing to continue negotiating and cash is building on the balance sheet which implies less potential dilution.  But a negative is the difficulty in trying to figure out what the real sticking point is....

 

I'll have to think about this one some more over the weekend.  Don't think anything has changed but a bit of a head scratcher. 

 

Hopefully this doesn't turn out like that FNMA thread.  200 pages later and just a bunch of circle jerking and no real outcome.

[Picasso]

Something I also thought of was the complexity of assets held by these ultra high net worth individuals.  For example, in 2015 Cline bought the rest of the GP from an early FELP investor:

 

http://investor.foresight.com/file/Index?KeyFile=27401090

Mr. Jones’s resignation from the Board follows the sale by Riverstone and its affiliates of all their ownership interest in Foresight Reserves LP (“FRLP”), FELP’s parent, to the remaining partners of FRLP, which are all Chris Cline controlled companies and trusts for the benefit of Cline family members.

 

Cline has a bunch of these controlled entities and trusts, like Raven is one that holds his interest in SXCP.  He has the capital but it's very likely across a lot of different trusts and corporations and I wonder how that might affect his decision making and any legal/fiduciary duties.  Even taxes can play a pretty big part with these ultra high net worth guys.

 

I don't think it prevents him from doing a deal that's ultimately beneficial but it would seemingly make this a pain in the ass to just suddenly pony up several hundreds of millions across all kinds of entities.  Just something to consider.

[Picasso]

I don't want to spam this thread too much, but I was looking at the 8-K on mobile and missed the rest of the filing.  The senior lenders have made their extension out to July 15th which is the first time that has happened.  So I think that Bloomberg report was probably right in that you're getting some terms worked out where the senior lenders are willing to extend three months while the note holders work out their deal fairly shortly.  I can imagine it was probably difficult in the past to work simultaneous deadlines with both groups of creditors so this would seem to take some leverage away from the note holders? 

 

And it reminds me of a comment Foresight made in one of the court documents

 

This issue could not be more critical, as the Partnership’s secured lenders have now begun noticing events of cross-default based upon the Court’s Opinion, and if they decide to accelerate, bankruptcy could follow.

 

That comment was made back on December 10th, so the fact the senior lenders have loosened up seems like a big deal to me.  It ties into my idea that Foresight's efforts so far have made the senior lenders much more comfortable.  So no full deal yet but I still think the probabilities of a deal are higher than they were a week ago.

 

Happy to hear others thoughts on this.

[Picasso]

Picasso, I think you need to bring more seriousness to this topic.  I shifted my grandmother's and all of her assisted living, denture-wearing friends into FELP on Wednesday.  If this thing doesn't work out, I am going to have to outrun a lot of motorized scooters......

 

You know those scooters only go about 10 miles on a full charge, so some light marathon training and I think you can escape their clutches...

[Picasso]

There are a few other things I wanted to highlight which I didn't go into before (I was hoping this would work out before hitting 10 pages, but oh well) so I'll go into that a little bit.  Maybe someone will find it helpful.

 

Aside from all the debt negotiations, I find the market dynamics pretty interesting here.  FELP, Murray bonds, SXC, SXCP are all interconnected but they can sometimes be so mispriced relative to each other.  It wasn't long ago that SXC was giving you SXCP at a discount plus other assets for free.  Now it's trading for 2x the value of SXCP with the big FELP worries still lingering at 25% of SXCP EBITDA.  I think it's different shareholder bases and not a lot of guys really paying attention to the different parts of these capital structures.

 

Here's one example: why has FELP traded like death the past few months?  Yeah you have these bad headlines like auditor going concerns, $1.4 billion of debt that can be accelerated with only $17 million cash on hand, talks of bankruptcy if a deal can't get done, coal sucks, etc.  In all fairness that sounds freaking terrible.  But more than anything look at who the shareholders are here. 

 

Out of 130 million units, only about 20 million are in the float.  Just one hedge fund (Accipiter) and one institution (Fidelity) owned 12.6 million units at the end of 2015.  Accipiter hasn't sold any because they would need to notify quickly with a form 4, but Fidelity owned over 20% of the float with 4.2 million units; average daily volume has been less than 100k shares at times. 

 

If you look at the last 13F, they bought more shares in the 4Q.  But if you look at the updated monthly holdings of their mutual funds, they've been selling since the start of the year.  (I'm attaching these screenshots by the way)  Not only that but on their largest $10 billion fund, FELP is the 4th smallest position out of over 100 holdings.  At this point it may even be the smallest if they aren't completely out.

 

Can you imagine working at this $10 billion Fidelity fund and there's a $200 million market cap coal stock apparently about to file bankruptcy?  Adding to that position is dead in the water.  It won't even move the needle and it's not worth the headache or the work for someone at Fidelity to stick their neck out on that position. 

 

There's always talk in various write ups about forced selling from institutions with spinoffs, but you can clearly see that to be the case here because 1) we have evidence of selling from the monthly mutual fund reports, 2) out of the million plus shares I've bought, there's no one else big enough to have sold me those shares and keep hitting the bid, and 3) there are no other institutional holders of the stock.

 

So now it gets me to the second part of my "market inefficiency" evidence.

 

Murray bonds, which are at risk as anything else in this story, fell to a low of under $10 this year but have rallied back to $20.  They are now positive on the year while FELP is still down over 50%.  If a deal is done and FELP is heavily diluted, those bonds are toast.  If Cline leaves Murray out to dry, those bonds are toast.  That bond appears to have recognized the likelihood of capital coming into the sponsor versus the LP and/or Cline/Murray structuring a beneficial deal for FELP. 

 

Now look at Foresight notes.  One day before the Bloomberg report last week, someone sold a couple million notes at $61 *and they were trading flat* so you're looking a price of say $57.  Even if a deal isn't made, why would someone sell those bonds at $57?  That's a margin of safety trade if I ever saw one.  Who knows, in the next week or two a deal might get done to get those out at par; nearly a double in less than a month on some bonds because of bad headlines or something.  Even in bankruptcy you probably get a lot more than $57 or $61.

 

Anyway I just thought I would highlight these more market related qualities.  They help explain why the opportunity exists despite the high probability of a deal getting done.

[Picasso]

Also something I found useful was a recent Bloomberg report on the state of the coal industry.  I sent it to a couple guys during the SXC saga but I'll attach it in case anyone wants to read it.  I'll highlight some of the more interesting points below.

 

So the domestic market share battle will heat up. Will PRB miner cede share to ILB competitors? So what's interesting

is that you have close to 60 million metric ton or 60, I keep saying metric, 60 million short tons of potential demand

could be grabbed by ILB miners. But that's capital letters for the word could. The Southeast may represent hunting

grounds for the ILB, an obvious risk to PRB, ILB miners supply only 14% of their home states coal consumption. And

then close to 30 million tons of PRB coal are expected to roll off contracts through 2017.

And what this kind of gives you from left to right are the coal deliveries to Alabama, Georgia, Tennessee, Arkansas,

Louisiana from the ILB. And then correspondingly coal deliveries from the PRB into those states and you can see the

difference is about 50 million metric tons, with the remainder of that original 60 stemming from Illinois. And then you

can see Illinois State Power Plant demand. Where it's coming from? Obviously, some very big PRB mines in there,

small sliver for the entire Illinois Basin. And then you can see the PRB coal contracts rolling off on the right hand side

for Peabody, Arch, Cloud Peak, various mines throughout each of those.

 

This will be one of the more interesting trends over the next few years.  Utilities are already relying more on the spot market and you can see this by looking at the massive drops in contracted volumes.  Yet FELP has had the smallest declines in YoY contracted volume at around 10% versus this time in 2015.  Some of these others are down 15-30%.  I'll try and post my spreadsheet on this later.  I don't see why Cline or Murray would walk away when they have an upcoming opportunity to steal share from the PRB coal miners. 

 

Another interesting opinion directly related to these FELP credit issues, which sort of fits along what I've been thinking:

 

There was also a question along those lines that came in on Foresight, that people aren't aware, so Murray Energy, of

course, took a significant position in Foresight last year. It's been determined that that triggered a change of control on

the Foresight Energy bonds with 600 million of bonds, which then allows the bondholders to force the company or to

have to repurchase those bonds at 101% of par. Foresight of course doesn't have liquidity to repurchases bond or at par

or even a slight premium to par. So what's going to happen here. They signed a forbearance agreement, which at this

point expires January 18th I believe. So they're working with their lenders, this is of course also triggered a default on

the credit agreement. So what does this mean?

Looking at the bonds, they're trading around $0.84 on the dollar, that to me doesn't imply that there is an imminent

bankruptcy or an imminent major loss there. That said, any negotiation like this is of course going to be complicated

and complex and lots of moving parts and pieces.

One question is how much support could Murray provide or could this also pull Murray in? Problem is Murray is a

private company, so it's kind of hard from where we sit to get a lot of insight into what may happen there. But I think

the take away with Foresight is, it looks like they're in some pretty heavy negotiations with their creditors. They are,

keep in mind, one of the few North American coal companies that seems to be holding together fairly well in the

current environment, at least relatively speaking. And forcing a company into bankruptcy doesn't necessarily solve

everybody's problems or anybody's problems, particularly the creditors.

So there may not necessarily be an incentive for the creditors to try to push the company over. They may be more

incentivized to try to work something out, maybe get themselves a better position from a collateral or a security ranking

standpoint and use this as an opportunity sort of rework the company's capital structure. But we'll see, it's going to be

an interesting process.

DN000000002248068753.pdf

[Green King]

where did you find the contacted coal numbers ? I could not find that.