FELP - Foresight Energy

[gadfly]

Murray is buying Mission met coal assets out of bankruptcy. Not much positive press here, that's for sure.

 

 

Murray has no incentive to support the share price. He is better off that the share price remains depressed if/when he take it private after paying off the MQD. I don't understand why Cline has approved this cap allocation unless he knows something demand wise? Bond market is pretty spooked due to inverted yield so maybe they are selling all the converted shares.

 

Cline has no control and no large capital outlay for Deer Run has been approved. On the call Moore guided to $10-15 mm of additional capex in 2019 to access the longwall face, but so far there has been no mention of actually laying out the ~100 mm required for longwall shields and related equipment.

 

But yeah sentiment stinks, thermal exports went from booming to uneconomical in about 4 months  :-[.  Domestic prices are much firmer than 2016 when ARA was last out of the money so hopefully they can move decent volume at okay prices. 

[valcont]

 

Cline has no control and no large capital outlay for Deer Run has been approved. On the call Moore guided to $10-15 mm of additional capex in 2019 to access the longwall face, but so far there has been no mention of actually laying out the ~100 mm required for longwall shields and related equipment.

 

But yeah sentiment stinks, thermal exports went from booming to uneconomical in about 4 months  :-[.  Domestic prices are much firmer than 2016 when ARA was last out of the money so hopefully they can move decent volume at okay prices.

 

Cline still holds significant shares at the LP level. He brought Brian Sullivan to the BoD and the new member of the general BoD , Leslie Ray used to work at Foresight, so he can still influence decisions.

 

You are right about $100m. I just saw Heth's post and assumed they put it out in the filings. Not sure where he got that number from?

 

So thinking about this year. They said 73% of the volume is already contracted and the first 2 qtrs of API 2 volume is hedged. Doesn't justify 30%  downward move. What gives?

[awindenberger]

Anybody still following? At this rate I will add a chunk soon, personally. Lots of catalysts impending that could unlock tons of value, but the market right now seems fixated on the current distribution amount. Or am I missing some big ticket item??

 

I’m still following myself and was also thinking about adding. They did bump up distribution a bit, but obviously it was much less than market expected. It seems to me though that they are a couple quarters away from being able to double distribution.

[morob]

https://www.bloomberg.com/news/articles/2019-04-04/profitable-coal-trade-beckons-chinese-willing-to-test-mainland

 

coal prices falling likely the reason for latest downdraft in stock.

[heth247]

https://www.bloomberg.com/news/articles/2019-04-04/profitable-coal-trade-beckons-chinese-willing-to-test-mainland

 

coal prices falling likely the reason for latest downdraft in stock.

 

But FELP is not totally dependent on export. From last CC, they said they were being opportunistic, going after whatever market that provides the best margin. In fact, for overall 2018, higher API2 price did not bring much improvement on margin. Most of the increased price was eaten up by transportation cost. I am hoping they can move more volumes domestically in 2019 and achieve higher margin.

[heth247]

 

Cline still holds significant shares at the LP level. He brought Brian Sullivan to the BoD and the new member of the general BoD , Leslie Ray used to work at Foresight, so he can still influence decisions.

 

You are right about $100m. I just saw Heth's post and assumed they put it out in the filings. Not sure where he got that number from?

 

So thinking about this year. They said 73% of the volume is already contracted and the first 2 qtrs of API 2 volume is hedged. Doesn't justify 30%  downward move. What gives?

 

My apology if my post was misleading. Yeah, they haven't announced the $100M spending for the shield yet. But they also said on the past CC that they weren't wait for too long. My guess is that they probably won't spend it until they get a big check from the pending insurance payment. Also, given the current weakness in export, not sure how much volume they plan to generate from Hillsboro. But Moore did said that they have the option to blend some of the volume with other coal and ship it to the east coast.

[morob]

https://www.bloomberg.com/news/articles/2019-04-04/profitable-coal-trade-beckons-chinese-willing-to-test-mainland

 

coal prices falling likely the reason for latest downdraft in stock.

 

But FELP is not totally dependent on export. From last CC, they said they were being opportunistic, going after whatever market that provides the best margin. In fact, for overall 2018, higher API2 price did not bring much improvement on margin. Most of the increased price was eaten up by transportation cost. I am hoping they can move more volumes domestically in 2019 and achieve higher margin.

 

 

One thing to consider is also the long term nature of the contracts and how lower or higher prices slowly roll into the P/L as older contracts end at different points in time and new ones are done under the respective current conditions. 

 

The recent stock price decline was rough. The volume is quite high and suggests a somewhat larger investor might be trying to get out. There was no Form 4 from any of the very large holders. At this point we should also be pretty much through most of the warrants overhang (or perhaps part of this sell off represents the remaining post warrant conversion liquidation?) I am trying to understand the current sell-off beyond the changing conditions in the export conditions as other ILB producers have only slightly sold off. It feels a bit like what normally happens after a dividend cut. Perhaps the expectations priced into the stock in terms of distribution increases have now been shattered due to reinvestments in Hillsboro and the deterioration in the export market. There was also some news of potential new capacity in the ILB basin. I guess all of that could add-up to "lower distributions for longer", but does it really warrant such a reaction on the stock price? The second lien notes are trading at a 19% yield versus a current dividend yield on the common of 14% (with $4.4 in MQD arrears which don't seem to get much value anymore). If distributions really don't change for the foreseeable future then it was probably unrealistic to expect the stock to trade at a mid single digit dividend yield and the recent sell-off makes more sense, at least from the viewpoint of a yield investor. On top of that, the equity is fairly small relative to the EV of the firm. Combine that with a commodity in secular decline and it should probably be no surprise to get a lot of volatility. The long term value described through out this threat hasn't changed much but the theses always rested on a sustainably favorable coal pricing environment which is necessary to de-lever and pay the MQD arrears. The recent decline in international coal prices might just be temporary due to a sharp fall in natgas prices in Europe (Germany) and coal import restrictions in China and longer contract negotiations can still be closed at reasonably attractive prices. But it certainly increases the risk that the domestic market will also be affected as potentially less domestic supply will be absorbed by the export market. I obviously haven't written anything new here but I wanted to see whether I could re-ignite the discussion in this threat somewhat.

 

 

 

[PullTheTrigger]

Maybe Accipiter is unloading. They previously reported 7,982,651 shares in February. They don't have to file form 4.

[sampr01]

Debt holders with warrants are selling most of the shares.

https://www.bloomberg.com/news/articles/2019-04-04/profitable-coal-trade-beckons-chinese-willing-to-test-mainland

 

coal prices falling likely the reason for latest downdraft in stock.

 

But FELP is not totally dependent on export. From last CC, they said they were being opportunistic, going after whatever market that provides the best margin. In fact, for overall 2018, higher API2 price did not bring much improvement on margin. Most of the increased price was eaten up by transportation cost. I am hoping they can move more volumes domestically in 2019 and achieve higher margin.

 

 

One thing to consider is also the long term nature of the contracts and how lower or higher prices slowly roll into the P/L as older contracts end at different points in time and new ones are done under the respective current conditions. 

 

The recent stock price decline was rough. The volume is quite high and suggests a somewhat larger investor might be trying to get out. There was no Form 4 from any of the very large holders. At this point we should also be pretty much through most of the warrants overhang (or perhaps part of this sell off represents the remaining post warrant conversion liquidation?) I am trying to understand the current sell-off beyond the changing conditions in the export conditions as other ILB producers have only slightly sold off. It feels a bit like what normally happens after a dividend cut. Perhaps the expectations priced into the stock in terms of distribution increases have now been shattered due to reinvestments in Hillsboro and the deterioration in the export market. There was also some news of potential new capacity in the ILB basin. I guess all of that could add-up to "lower distributions for longer", but does it really warrant such a reaction on the stock price? The second lien notes are trading at a 19% yield versus a current dividend yield on the common of 14% (with $4.4 in MQD arrears which don't seem to get much value anymore). If distributions really don't change for the foreseeable future then it was probably unrealistic to expect the stock to trade at a mid single digit dividend yield and the recent sell-off makes more sense, at least from the viewpoint of a yield investor. On top of that, the equity is fairly small relative to the EV of the firm. Combine that with a commodity in secular decline and it should probably be no surprise to get a lot of volatility. The long term value described through out this threat hasn't changed much but the theses always rested on a sustainably favorable coal pricing environment which is necessary to de-lever and pay the MQD arrears. The recent decline in international coal prices might just be temporary due to a sharp fall in natgas prices in Europe (Germany) and coal import restrictions in China and longer contract negotiations can still be closed at reasonably attractive prices. But it certainly increases the risk that the domestic market will also be affected as potentially less domestic supply will be absorbed by the export market. I obviously haven't written anything new here but I wanted to see whether I could re-ignite the discussion in this threat somewhat.

[heth247]

I wonder why the debt holders are selling the shares now. Maybe they see a risk of distribution cut?

[PullTheTrigger]

How do you know it’s debt holders selling?

[morob]

I don't think the warrant conversion can explain the recent volume unless people converted in the past without selling the units and are selling now.

 

As of dec 31, there were only 51480 warrants left. Out of those 17556 are owned by the Cline Group, so they are likely not being exercised for the time being. It is interesting that Q4 was the only Quarter over the last couple of years without any warrant conversion. Here is the quarterly development of warrants outstanding since Q3 2017.

 

Q4: 51k

Q3: 51k

Q2: 133k

Q1: 142k

Q4: 347k

Q3: 384k

 

The remaining warrants have a conversion rate of 14 units of common shares for 1 warrant. So if I take the outstanding warrants (ex Cline Group warrants) of 33924 and multiply by 14, I get 474935 Felp common units. Not sure that can explain all that volume as of late, even if I assume all of them were converted, which might not be the case since Q4 had no conversion which points to the possibility that there might be some holders with longer term motives.

 

Also, here is Accipiter Capital's 13F. Of the reported positions, only Foresight remains. Unless they have foreign, unreported holdings, this seems to be their only position left. They actually have increased it slightly in Q4:

 

https://whalewisdom.com/filer/accipiter-capital-management-llc#tabholdings_tab_link

 

[PullTheTrigger]

That was Accipiter’s position reported in February. We won’t know if it’s changed until May.

 

It might not be Accipiter. Who knows.

[Patmo]

So here's a question, given the management estimate of 300-340mil EBITDA and 80-95mil capex for 2019, if there were no debt covenants restricting distributions, what range of distributions would FELP be able to issue sustainably for this particular year?

 

[PullTheTrigger]

In 2018, FELP paid dividends of $0.2295 with a retained percentage of 25%. If there was no retained percentage, you could argue they could afford to pay out $.2295 per quarter or $0.91 annually.

 

Moore said in response to a question on the conference call on May 8, 2018:

 

I want to definitely get us down to a level less than 3x and we can I think achieve that in the next year and a half. We have got a lot of debt that we pay-down next year over the course of this year and next as it relates to some of our leased equipment that’s part of that secured leverage ratio that terms out between August and October of 2019. That’s about $40 million – equipment fall on $40 million to $50 million of principal that’s going out annually right now that rolls off. So we have got the ability to de-lever this business in that period of time. Obviously, we have got to continue to do what we have been doing on the operating side of the business that’s where it all starts with our cost structure as long as we can maintain that with some confidence that we can. I think we are on our way to de-levering. Once we get down to that level that requires us only to sweep 25% of our excess cash flow, so that would allow us potentially to distribute up to 75% of excess retained excess cash flow on a go forward basis.

 

So has his thinking changed? I don't know. I've sent three emails to investor relations with no response and left a voicemail with no response. Reducing debt previously seemed like priority number one, but maybe that's changed.

 

 

 

[Patmo]

In 2018, FELP paid dividends of $0.2295 with a retained percentage of 25%. If there was no retained percentage, you could argue they could afford to pay out $.2295 per quarter or $0.91 annually.

 

Moore said in response to a question on the conference call on May 8, 2018:

 

I want to definitely get us down to a level less than 3x and we can I think achieve that in the next year and a half. We have got a lot of debt that we pay-down next year over the course of this year and next as it relates to some of our leased equipment that’s part of that secured leverage ratio that terms out between August and October of 2019. That’s about $40 million – equipment fall on $40 million to $50 million of principal that’s going out annually right now that rolls off. So we have got the ability to de-lever this business in that period of time. Obviously, we have got to continue to do what we have been doing on the operating side of the business that’s where it all starts with our cost structure as long as we can maintain that with some confidence that we can. I think we are on our way to de-levering. Once we get down to that level that requires us only to sweep 25% of our excess cash flow, so that would allow us potentially to distribute up to 75% of excess retained excess cash flow on a go forward basis.

 

So has his thinking changed? I don't know. I've sent three emails to investor relations with no response and left a voicemail with no response. Reducing debt previously seemed like priority number one, but maybe that's changed.

 

Imagine a world where the liabilities were refinanced at more standard terms tomorrow morning. The stock would instantly rerate to $6.50 assuming a 14ish% yield is still required by common investors. The cash flow sweep is just an artificial cap on distributions. In exchange for getting those distributions a couple years later (in arrears, to boot, effectively limiting the market cap to the commons further and further into the future), you delever the company bit by bit until either refinance or reaching the threshold naturally on the existing covenant. That's my big picture, "joker" view of this stock...

[morob]

In 2018, FELP paid dividends of $0.2295 with a retained percentage of 25%. If there was no retained percentage, you could argue they could afford to pay out $.2295 per quarter or $0.91 annually.

 

Moore said in response to a question on the conference call on May 8, 2018:

 

I want to definitely get us down to a level less than 3x and we can I think achieve that in the next year and a half. We have got a lot of debt that we pay-down next year over the course of this year and next as it relates to some of our leased equipment that’s part of that secured leverage ratio that terms out between August and October of 2019. That’s about $40 million – equipment fall on $40 million to $50 million of principal that’s going out annually right now that rolls off. So we have got the ability to de-lever this business in that period of time. Obviously, we have got to continue to do what we have been doing on the operating side of the business that’s where it all starts with our cost structure as long as we can maintain that with some confidence that we can. I think we are on our way to de-levering. Once we get down to that level that requires us only to sweep 25% of our excess cash flow, so that would allow us potentially to distribute up to 75% of excess retained excess cash flow on a go forward basis.

 

So has his thinking changed? I don't know. I've sent three emails to investor relations with no response and left a voicemail with no response. Reducing debt previously seemed like priority number one, but maybe that's changed.

 

Imagine a world where the liabilities were refinanced at more standard terms tomorrow morning. The stock would instantly rerate to $6.50 assuming a 14ish% yield is still required by common investors. The cash flow sweep is just an artificial cap on distributions. In exchange for getting those distributions a couple years later (in arrears, to boot, effectively limiting the market cap to the commons further and further into the future), you delever the company bit by bit until either refinance or reaching the threshold naturally on the existing covenant. That's my big picture, "joker" view of this stock...

 

What common holders really should want is deleveraging first before increasing distributions. If coal prices/demand are not rising it should probably also come before adding more capacity at Hillsboro. The eventual home run would likely only be achieved by getting Hillsboro started again but is there enough demand to place them at the right price now that the export has gotten soft? We don't know that but my hunch is that things have gotten more difficult . But in the meantime, the value added simply by buying back some of the 2nd Lien notes would be substantial. They have said themselves that they don't understand why their bonds are trading at these low levels. It is hard to please everyone and they probably felt they had to pay a reasonable distribution first before doing anything else. But from a pure capital allocation point of view, the last thing I would want right now is more distribution. Unfortunately, I am not sure enough has changed in their credit profile since their last refi to hope for a substantially better outcome in a new refi. For now, reducing the principle of the 2nd lien notes would be a good start unless they really see a way to profitably place extra Hillsboro tons.

[heth247]

Imagine a world where the liabilities were refinanced at more standard terms tomorrow morning. The stock would instantly rerate to $6.50 assuming a 14ish% yield is still required by common investors. The cash flow sweep is just an artificial cap on distributions. In exchange for getting those distributions a couple years later (in arrears, to boot, effectively limiting the market cap to the commons further and further into the future), you delever the company bit by bit until either refinance or reaching the threshold naturally on the existing covenant. That's my big picture, "joker" view of this stock...

 

Given that the 2L is traded for yield of 18%, nobody will put in money to refinance them tomorrow.

[heth247]

What common holders really should want is deleveraging first before increasing distributions. If coal prices/demand are not rising it should probably also come before adding more capacity at Hillsboro. The eventual home run would likely only be achieved by getting Hillsboro started again but is there enough demand to place them at the right price now that the export has gotten soft? We don't know that but my hunch is that things have gotten more difficult . But in the meantime, the value added simply by buying back some of the 2nd Lien notes would be substantial. They have said themselves that they don't understand why their bonds are trading at these low levels. It is hard to please everyone and they probably felt they had to pay a reasonable distribution first before doing anything else. But from a pure capital allocation point of view, the last thing I would want right now is more distribution. Unfortunately, I am not sure enough has changed in their credit profile since their last refi to hope for a substantially better outcome in a new refi. For now, reducing the principle of the 2nd lien notes would be a good start unless they really see a way to profitably place extra Hillsboro tons.

 

I fully agree with what you said. Don't understand why they don't buy back the 2L or even common units, which are both better capital allocation than distribution.

[Patmo]

Imagine a world where the liabilities were refinanced at more standard terms tomorrow morning. The stock would instantly rerate to $6.50 assuming a 14ish% yield is still required by common investors. The cash flow sweep is just an artificial cap on distributions. In exchange for getting those distributions a couple years later (in arrears, to boot, effectively limiting the market cap to the commons further and further into the future), you delever the company bit by bit until either refinance or reaching the threshold naturally on the existing covenant. That's my big picture, "joker" view of this stock...

 

Given that the 2L is traded for yield of 18%, nobody will put in money to refinance them tomorrow.

 

It was just an exercise

[Patmo]

In 2018, FELP paid dividends of $0.2295 with a retained percentage of 25%. If there was no retained percentage, you could argue they could afford to pay out $.2295 per quarter or $0.91 annually.

 

Moore said in response to a question on the conference call on May 8, 2018:

 

I want to definitely get us down to a level less than 3x and we can I think achieve that in the next year and a half. We have got a lot of debt that we pay-down next year over the course of this year and next as it relates to some of our leased equipment that’s part of that secured leverage ratio that terms out between August and October of 2019. That’s about $40 million – equipment fall on $40 million to $50 million of principal that’s going out annually right now that rolls off. So we have got the ability to de-lever this business in that period of time. Obviously, we have got to continue to do what we have been doing on the operating side of the business that’s where it all starts with our cost structure as long as we can maintain that with some confidence that we can. I think we are on our way to de-levering. Once we get down to that level that requires us only to sweep 25% of our excess cash flow, so that would allow us potentially to distribute up to 75% of excess retained excess cash flow on a go forward basis.

 

So has his thinking changed? I don't know. I've sent three emails to investor relations with no response and left a voicemail with no response. Reducing debt previously seemed like priority number one, but maybe that's changed.

 

Imagine a world where the liabilities were refinanced at more standard terms tomorrow morning. The stock would instantly rerate to $6.50 assuming a 14ish% yield is still required by common investors. The cash flow sweep is just an artificial cap on distributions. In exchange for getting those distributions a couple years later (in arrears, to boot, effectively limiting the market cap to the commons further and further into the future), you delever the company bit by bit until either refinance or reaching the threshold naturally on the existing covenant. That's my big picture, "joker" view of this stock...

 

What common holders really should want is deleveraging first before increasing distributions. If coal prices/demand are not rising it should probably also come before adding more capacity at Hillsboro. The eventual home run would likely only be achieved by getting Hillsboro started again but is there enough demand to place them at the right price now that the export has gotten soft? We don't know that but my hunch is that things have gotten more difficult . But in the meantime, the value added simply by buying back some of the 2nd Lien notes would be substantial. They have said themselves that they don't understand why their bonds are trading at these low levels. It is hard to please everyone and they probably felt they had to pay a reasonable distribution first before doing anything else. But from a pure capital allocation point of view, the last thing I would want right now is more distribution. Unfortunately, I am not sure enough has changed in their credit profile since their last refi to hope for a substantially better outcome in a new refi. For now, reducing the principle of the 2nd lien notes would be a good start unless they really see a way to profitably place extra Hillsboro tons.

 

Not disagreeing with you there at all morob, thanks for the comments.

[morob]

ILB coal pricing just ticked up almost $3/ton to $40.2 (see attached chart), the highest it has been over the past 3-4yrs. So far no spill-over from weak API2 into ILB pricing. Very encouraging!

[PullTheTrigger]

Any thoughts about why ILB pricing is up?

 

Perhaps a combination of low utility coal stock piles and higher exports last year. Will be interesting to see if it holds.

[morob]

Not sure, a wild guess would be mine closures over past years, bankruptcies etc..

 

This is from last earnings call Q&A:

 

Can you give us a little color on that Increase in domestic tons which would be the first one in a while?

 

Rob Moore

 

It is a combination of existing markets that we serve and some new markets. What we're seeing is as utility customers are unable to find coal that they have historically been able to source, they are looking outside of the box and coming up with what I'll refer to as blends of coal, that allow them to meet the specifications of their specific boilers, and we're trying to take advantage of that where we can.

[Picasso]

In regards to the big swan dive in the share price, the fund who led the change of control lawsuit against Foresight was DDJ. After getting paid out on the bonds they received a bunch of those warrants and exercised them but never sold the shares until what appears to be the end of February. They subadvise this PGBAX fund and you can see the holdings here:

 

https://secure05.principal.com/document-download/api/v1/public/document?format=VOP&itemId=FS3RE021327

https://secure05.principal.com/document-download/api/v1/public/document?format=VOP&itemId=FS3RE011327

Just search for Foresight in their holdings and you'll see they held 695k shares at a basis of $0.89 since the April 2017 refi. It dropped to 682k shares at the end of February which indicates to me they started selling after earnings. We'll get the update for their March holdings soon to confirm this:

 

https://www.principal.com/InvestmentProfiles/literature.faces?inv=9475&rtclss=20&retail=true

 

If you look at the manner in which someone has been selling since earnings, it appears to be these guys. For whatever reason they are exiting that position quickly and if you sit on the bid that hard at 20-30% of the volume since last earnings it's going to cause this type of market reaction. Plus there are another 700k shares that were not exercised as of year end that could very well be piling on since it's approaching the basis on exercise.

 

I'm surprised they held the equity position this long given they are bond investors but it's such a small part of the fund and it's another year of no distribution increases plus some uncertainty around earnings given export prices so I'm not surprised they want to blow out now either. I think they have a reasonable basis to sell given their basis and size without having much regard for maximizing what they can sell the warrant piece for if they simply dribbled it out more slowly. Their basis is $0.89/unit after all.

 

All that said I think it has created an opportunity for Murray to acquire the rest of the common units because arrears are over $4/unit and you have them trading in the market at a third of that with a shareholder base that would probably be happy to exit in the mid single digits. For $350 million they could buy the 70 million units not owed by them for $5/unit and basically get the whole company for the price of the arrears. Rip up the partnership agreement with all these MQD's so dividends can be paid to the entire equity structure instead of the minorities. The timing also seems ripe with Deer Run adding to production in 2020. Margins may very well contract next year but with volumes going up I don't think it's going to negatively impact their cash flow picture. Look at the massacre in the PRB (whether from EIA reports of late or Cloud Peak's upcoming restructuring), I have a hard time seeing how ILB won't be able to displace a lot of that.

 

Whether they can come up with the capital to take out this share structure, I think it can be done. Plus I imagine if they put on more leverage at FELP to own the whole thing they can do the same thing they've done over the years at both companies where they do some debt exchanges to avoid court restructurings because the lenders don't want to run these assets even if they're tripping covenants. Leverage doesn't seem to stress these guys out and they have an opportunity to own the whole thing for a pretty good price.