FELP - Foresight Energy

[PullTheTrigger]

90% of all LP's need to agree on buyout price, right? So Cline and Accipiter definitely would need to agree. Or Cline and another 10% chunk.

[awindenberger]

Thanks for the heads up Picasso. Nice to see you around on the FELP board again.

[morob]

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.

 

The fund's March portfolio holding report seems to have been published yesterday and indicates they are back at the 695k shares, right were they were in January. There must be another explanation for the small drop in February. Anyway, seems to indicate the selling isn't them, at least up to the end of March. As you mentioned, there are still plenty of other pockets of creditor holdings who could have been exercised and are selling now.

 

https://secure05.principal.com/document-download/api/v1/public/document?format=VOP&itemId=FS3RE031327

 

[PullTheTrigger]

The date on their report says 2018 even though the link says 2019.

[morob]

The date on their report says 2018 even though the link says 2019.

 

good catch, thanks

[JRH]

The date on their report says 2018 even though the link says 2019.

 

Definitely isn't March 2019 - look at total assets listed at the bottom of the report vs. prior months.

[morob]

The date on their report says 2018 even though the link says 2019.

 

Definitely isn't March 2019 - look at total assets listed at the bottom of the report vs. prior months.

 

I already sent them a note to update the link.

[PullTheTrigger]

The selling has to be more than just DDJ given roughly 4 million shares traded since late Feb. Maybe Accipiter. We'll find out about Accipiter in May.

 

Regardless, Picasso has an interesting point about the possibility of a buyout. It would seem to make financial sense from Murray's position if he could secure funding. What is Cline's perspective? Why would he sell now?

 

 

[patience_and_focus]

The selling has to be more than just DDJ given roughly 4 million shares traded since late Feb. Maybe Accipiter. We'll find out about Accipiter in May.

 

Regardless, Picasso has an interesting point about the possibility of a buyout. It would seem to make financial sense from Murray's position if he could secure funding. What is Cline's perspective? Why would he sell now?

 

This may be a very naive question, but is it not possible that Cline group is also interested in purchasing shares in the open market (assuming that all the shares were traded in open market)? They must surely know that the equity price is undervaluing FELP and also must have considered the possibility of Murray trying to take over.

[heth247]

Hi Guys, how do you get comfortable with the fact that FELP's 2L bond is going down to 78 now? What do those bond investors see that we don't see? They are not stupid.

[Picasso]

Hi Guys, how do you get comfortable with the fact that FELP's 2L bond is going down to 78 now? What do those bond investors see that we don't see? They are not stupid.

 

The 2L’s have always been stranded in the capital structure since the 2017 refi. The company has taken cash to address the 1L repayments via sweep with the rest towards repaying equipment leases (the last of which run off this year aside from anything new they add for Deer Run in future years) and equity distributions. They should be buying that debt but they have this MQD problem and have maxed out allowable distributions to solve it. And not to mention any increase in leverage to take out minority holders will likely be senior to the 2L’s and further subordinate them.

 

In fact adding more leverage senior to the 2L’s would probably work nicely because it would free them up to acquire the 2L’s in the open market with excess cash instead of worrying about the MQD’s. They could acquire each $100 million of liability between now and 2023 for less than $50 million between interest and principal reduction. And as they approach maturity with far less outstanding and the make whole provision getting back to par they could handle that refinance. If anything adding more senior leverage will help them pull in more value to their equity if they’re able to reduce leverage by making open market purchases which they can’t do right now without blowing up their MQD situation further.

[Picasso]

Here's the math (cc: /r/theydidthemath)

 

My assumptions here are that EBITDA can be anywhere between 300-400 million by 2022. If you add $350 million of debt to take it up to $1.75 billion you are 5.8x levered on 2018/2019 numbers.

 

Get the 1L's to agree to a 75% cash flow sweep and the other 25% goes towards 2L repayment which can be done in the open market. Maybe have to bump up the rate 100 bps. No equity dividends unless they're levered under 4x or whatever.

 

From now until 2022 (the 2L's come due in 2023) they pay $75 million of 1L's and buy 2L's in the open market with what's left of their excess cash flow. Excess cash will probably ramp up a bit with Deer Run online but if it averages $100 million/year then leverage falls back to $1.35 billion and interest expense is back to where it is today. There have to be some other cost savings in there from removing some of the overhead and management contracts between the two co's.

 

If EBITDA is anywhere between $300-400 million in 2022 and you give it a 5-6x multiple then their equity stake will be worth anywhere between $150 million to $1 billion with 3.4-4.5x leverage.

 

If they don't do this and just keep up with the status quo then by 2022 the arrearages go up to $9/unit. That's an additional $720 million sitting in front of the subordinated equity stake minus whatever they are able to pay in distributions between now and then. And you have more debt to refinance because you had to worry about making those dividend payments instead of buying the 2L's. That subordinated stake is worthless unless EBITDA is somehow $500 million or something along those lines.

 

Not to mention the idea of being a public coal yieldco is crazy at this point (look at the cost of capital across the entire space). And it's even harder to deal with debt paydown when you're a partnership structure. There is absolutely no reason for this to be a public company at this point. They tried paying a dividend but the market doesn't care. So the best way to deal with that is take it private and when market conditions are better take it public again if need be. Not to mention having a public yield co with no float is another terrible idea. You need a vehicle like this to have way more liquidity to be put in passive index funds or get any analyst coverage. They can't fix that unless they take care of the MQD's because you can't issue shares down here.

 

There's $150 million to $1 billion or more of capital sitting there waiting for the sponsor to have a shot at. What better time than when some bondholders decide to pressure the stock back to prices that make a deal manageable and there's some uncertainty around their business.

[gadfly]

Here's the math (cc: /r/theydidthemath)

 

My assumptions here are that EBITDA can be anywhere between 300-400 million by 2022. If you add $350 million of debt to take it up to $1.75 billion you are 5.8x levered on 2018/2019 numbers.

 

Get the 1L's to agree to a 75% cash flow sweep and the other 25% goes towards 2L repayment which can be done in the open market. Maybe have to bump up the rate 100 bps. No equity dividends unless they're levered under 4x or whatever.

 

From now until 2022 (the 2L's come due in 2023) they pay $75 million of 1L's and buy 2L's in the open market with what's left of their excess cash flow. Excess cash will probably ramp up a bit with Deer Run online but if it averages $100 million/year then leverage falls back to $1.35 billion and interest expense is back to where it is today. There have to be some other cost savings in there from removing some of the overhead and management contracts between the two co's.

 

If EBITDA is anywhere between $300-400 million in 2022 and you give it a 5-6x multiple then their equity stake will be worth anywhere between $150 million to $1 billion with 3.4-4.5x leverage.

 

If they don't do this and just keep up with the status quo then by 2022 the arrearages go up to $9/unit. That's an additional $720 million sitting in front of the subordinated equity stake minus whatever they are able to pay in distributions between now and then. And you have more debt to refinance because you had to worry about making those dividend payments instead of buying the 2L's. That subordinated stake is worthless unless EBITDA is somehow $500 million or something along those lines.

 

Not to mention the idea of being a public coal yieldco is crazy at this point (look at the cost of capital across the entire space). And it's even harder to deal with debt paydown when you're a partnership structure. There is absolutely no reason for this to be a public company at this point. They tried paying a dividend but the market doesn't care. So the best way to deal with that is take it private and when market conditions are better take it public again if need be. Not to mention having a public yield co with no float is another terrible idea. You need a vehicle like this to have way more liquidity to be put in passive index funds or get any analyst coverage. They can't fix that unless they take care of the MQD's because you can't issue shares down here.

 

There's $150 million to $1 billion or more of capital sitting there waiting for the sponsor to have a shot at. What better time than when some bondholders decide to pressure the stock back to prices that make a deal manageable and there's some uncertainty around their business.

 

I don't see how there is any appetite for a deal like this. You're asking term loan guys to take high yield/equity risk and the forcing 2L guys to take straight up equity risk -- if volumes out of Hillsboro aren't placed at decent margins, or there is an operational hiccup, excess cash flow could certainly disappear.  Something like this does make sense for Murray, but I just don't see how it flies at a DoubleLine IC meeting. 

 

I guess you can say FELP is on the lowest part of the cost curve and ILB has a more favorable outlook than other basins so the market should allow more leverage, but this is coal mining after all and 5.8x seems excessive.  Look at Arch and ARLP -- Arch has negative net debt and is on track buy back 40% of its stock by the end of the year; Joe Craft from ARLP mentioned that he views low debt as a strategic advantage and doesn't plan to increase leverage anytime soon. I guess Murray is a leverage/banking fee junkie, but part of me thinks he may have mentally written his FELP sub units to zero and just wants to bide time collecting his MSA and hope for a bullish market to make a move. 

 

Murray and FELP are great operators and have survived high leverage because of their performance and asset quality, but I think we're at a point now where you can't assume their will be reasonable refi options for highly levered thermal players.

 

 

[Picasso]

Sure but keep in mind the 2017 refinance had a lot of unrestrictive aspects to it to give them flexibility to make dividend payments and access a $170 million revolver. If Murray has written his sub units down to zero then why bother making any of the $35 million of dividend payments they've made since 2017. They could have just paid down debt and let all the equity holders suffer together while waiting on better days. Or they could have let someone else put in the $60 million of cash to take on the common units during the 2017 refi knowing they had little path to take care of the MQD's. And they could have let the PIK note redeem for equity instead of refi that out.

 

If they wait for better days to make a move then there would be no reason for the minority holders to sell because the market wouldn't have the units trading for $1.60.

 

I've seen a number of issuers where they are perennially levered 5-6x but they keep throwing out bones to the creditors to handle a refinance because it's too messy to actually restructure or sell the thing in court if they have a habit of continuing to pay. That's why I say they could change the cash flow sweep to 100% and bump the rate to get the deal done.

 

The 2L's are more like unsecured bonds if things get bad. They say they're 2L but there's nothing under them. With $800 million of 1L debt in front of it and if EBITDA takes the kind of hit one would be worried about they're not in a great position with comps like Alliance trading in the 4x EBITDA range. The second they were issued they were essentially the equity and cross your fingers tranche if things went bad. I've always liked the 2L's because I didn't think the bad outcome was anything more than low probability but getting primed was always the risk with owning them.

 

Overall I think my point is that the company has a solid case to go to creditors and say they can better handle their creditworthiness by taking out the current equity structure and focusing solely on debt paydown instead of doing what they're doing now. It's not so much that this company should or shouldn't be public, it's that the equity structure makes no sense given the situation.

[PullTheTrigger]

DDJ still had 646k shares in March. Perhaps they’ve accelerated selling since.

 

 

[gadfly]

https://www.spglobal.com/platts/en/market-insights/latest-news/coal/041919-deer-run-other-illinois-basin-mines-could-change-market-dynamics-18apr19?

 

Looks like Hillsboro is ready to reopen if that's the direction FELP is going to go.

 

According to the article, ILB producers moved 88 mm domestic tons last year, down from 92 mm in 2016 and 130 mm in 2014.  Looks like without the export outlet domestic prices will be under pressure.

[Patmo]

Anybody else buying right now?

[newbee]

2019-1Q results out. Conference call today 2 PM ET

 

http://investor.foresight.com/file/Index?KeyFile=397849200

 

 

Results seems to be ok. Dividend suspended & 2019 EBITDA guidance reduced

 

First Quarter 2019 Highlights:

 

Coal sales of $267 million on sales volumes of 5.7 million tons.

Adjusted EBITDA of $65.5 million.

Cash flows from operations of $49.2 million.

Net loss of $16.8 million, or ($0.09) per common unit and ($0.15) per subordinated unit.

 

"Adjusted EBITDA – Based on the projected sales volumes and operating cost structure, Foresight currently expects to generate Adjusted EBITDA in a range of $260 to $300 million. Capital Expenditures – Total 2019 capital expenditures are estimated to be between $70 and $85 million."

[Guest roark33]

Between capex and debt repayments, I am not sure the equity will ever see any money from this investment.  My two cents...which may incidentally be worth more than the equity at some point. 

[Green King]

Between capex and debt repayments, I am not sure the equity will ever see any money from this investment.  My two cents...which may incidentally be worth more than the equity at some point.

 

This has been a interesting test of character for me. (Still enjoying it a lot overall) I brought too much. These were the moves I thought they were going to make one year ago. It didn't make sense for them to pay a dividend. I guess one more year.

 

 

[Patmo]

Hold my Bill Miller, I'm going in

[sampr01]

Don't worry, already there. It looks like they cut their DIV for this quarter.

Hold my Bill Miller, I'm going in

[tgrafos]

Picasso-any thoughts here?? Is this a donut?

[valcont]

Wow what a reaction on dividend suspension. But what concerns me is that this is not a knee-jerk reaction, the selling has been going on since the last quarter. Still have no clue what it is but this stock is broken. The management has no incentive to support the price. And now with API2 in the 60s, Murray may just focus on servicing the debt and try to buy out the shareholders for peanuts come 2022.

 

What's the bull case here? Europe industrial output is crap, China is blocking Australian coal and there is a glut of natural gas.

[Picasso]

Picasso-any thoughts here?? Is this a donut?

 

I think Foresight's GP always had a couple options with the business post restructuring. One was to be shareholder friendly, pay out distributions, and at some point take its share of the earnings of the business. The other was the nuclear option to wear down the common unit holders and essentially pressure the stock price enough to be able to either call in or acquire the minority holders, including Cline, at a price affordable to the GP. I could be wrong here but I think the company flipped from being shareholder friendly (perhaps because it appeared to be a viable path as recently as last year) to hitting the nuclear option.

 

I thought the distributions being paid since 2017 was evidence that they were planning to earn their way out of the arrears. And they did increase the distribution last quarter. Murray had put in equity at $6/unit, they started doing normal conference calls, and so on. Now all of a sudden in the span of a few months they feel that much less confident to pay out any distributions while still making growth investments in Deer Run and this land acquisition at Sugar Camp. In fact the tone on Foresight's call and press release couldn't be any more different than that of Alliance's, Consol's, Hallador's, etc. Either they suddenly because poor operators overnight or they decided they wanted to use this weakness as the start of pressuring the minority shareholders out. The flooded river conditions are temporary and the reduction in those volumes appear to have driven all of the reduction in EBITDA guidance and the Q1 results. It appears that they couldn't deliver on higher priced export tons and that drove most of the shortfall. That's probably something you should emphasize on the press release if you don't want to freak people out, especially when you're about to bring on 5-8Mt of new production. If they can't find a home for those 1-2Mt, won't it be difficult to find a home for the Deer Run production? And why buy more land for nearly $10 million around Sugar Camp.

 

Now I think the counter argument is that Foresight was heavily reliant on exports, has more leverage and less wiggle room than its peers. But their guidance and leverage is not only in line or better than last years but they're nowhere near tripping any covenants and it only takes around $20 million to cover these distribution payments. Taking that $20 million and paying down debt only goes so far for the GP because on the other side the arrears go up by $25 million/quarter. I think knowing that suspending the dividend only worsens the arrears situation, they would only do so if they planned to buy out the minority holders. If they know they have $480 million of arrears to deal with in a couple years, wouldn't it be nice to buy it all out for $160 million if the common unit holders took $2/unit?

 

It also might be that their outlook for thermal coal is so dire that they want to use available cash to repurchase debt to be able to keep Foresight on a path to continue making management payments to Murray Energy. But then that doesn't fit in with them making these growth investments back into Deer Run and Sugar Camp.

 

I'm thinking the same tactics they used for the NRP negotiation are probably being used here. If you recall, last year they put out a release saying they were writing down the value of Hillsboro because the coal couldn't be mined and so on. Everyone said well there goes that call option, then all of a sudden they settle with NRP and end up with a new agreement with less than half the original cost. And a month later they start putting out job postings and say they are going to bring out 5-9Mt of production. I don't think NRP is going to complain if they bring in that production but can you imagine what kind of face Foresight put on during negotiations about the fire, and how they can't mine it because of regulators, and then suddenly the fire is out and things are fine they just need some equipment. I bet they're doing the same thing with the insurance litigation. It's working so well for them there I guess they might want to try it on the common unit holders.

 

Anyway, guidance is basically the same as past years not because of price but because of volumes reductions due to conditions on the river and ports. And we still have pending insurance recoveries of up to $60 million. That's not something to take the stock back to 2016 levels when the company had even less EBITDA than now, worse coal prices, and $1.4 billion of debt accelerated to them. What I think could justify the stock here is the way the company has decided to treat the situation and remain vague on a variety of material parts of the business. But should it be at 1-2x excess cash flow because of that, 4x EBITDA? Maybe, I don't know.

 

There are some other questionable things here such as the new few years for coal markets. Inventories are tight in the U.S. but the international picture looks pretty well supplied if not oversupplied. I think there has to be some extra reliance on domestic markets given that and maybe demand for that falls faster than expected. There's a lot that could impact that, like I see EIA forecasts of reduced coal demand in 2019 are based on weather forecasts for a mild summer and winter. That could change things quickly just like the export picture changed in a few months.

 

One other thing that stood out to me, among many, is that Foresight appears unwilling to use their low cost structure to set the market price. Moore mentioned on the call not wanting to bring on tons that would pressure coal prices. I don't see why they wouldn't do that if the net result was positive? It would drive out higher cost producers and certainly benefit them on getting rid of these arrears. But then I realized that it wouldn't be good for Murray Energy to have Foresight put those extra tons onto the market because it would directly impact their sales as well. So maybe in addition to the management fees they earn from Foresight they also get the benefit of keeping the lower cost tons rationalized. My guess is if they owned all of it they would be more aggressive putting tons into the market at lower prices. Which again makes this share structure Foresight currently sits in very unwieldy.

 

I don't think this is a donut but I've been wrong on this the past year or two. In theory if they focus all excess cash flow on debt repayment with a Deer Run longwall coming back, some insurance recoveries and they can make some meaningful debt reduction then I could see the 2L's creep back up to par. Notice on the call they wouldn't say how much 2L they wanted to buyback in the market or were allowed to. Those holders are in the same boat we are, Foresight has no interest in talking up the price on those bonds at this point until they have to deal with a refi. By being vague and making things out to be bad they can buy more of that debt which can probably help in their efforts to roll up the minority holders when it makes sense to do so. They can't just come out next week and say "hey guys, we'll buy everyone out for $1/unit after tanking the price." But if the 2L debt has a cost of capital of 11% again instead of 20%, I don't think the equity will still have a 50-70% cost of capital. They could very well miss their window to squeeze out the minority holders if the debt reduction goes too well. My best guess here is they do this debt repayment for a bit then attempt the squeeze out.

 

By all accounts the units are in a weird limbo between coal markets that are on balance weak, a potential squeeze out between Murray and Cline/minority holders, a focus on debt repayment, and so on. That's a lot of uncertainty to deal with.