FELP - Foresight Energy

[wachtwoord]

wachtwoord,

 

Here is one for you : USA Today [July 5^th 2019] : Billionaire coal executive Chris Cline, 6 others die in helicopter crash in the Bahamas.

 

Oh wow Cline himself (and posibly one of his heirs). Thanks for the link John.

 

This will certainly effect this stock but I'm having trouble geeting to grips with how. Will Murray run away with this now? How will this effect minority holders?

[morob]

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.

 

FELP's 2L (mid 20s) currently trading below Murray bonds (mid 40s) might support your argument of investors fearing a potential buy-out with new debt senior to 2Ls.

[Ahab]

Would funding be secured though  ;D

[Ahab]

Jokes aside, those bonds have dropped like a stone since Cline's untimely passing. Having watched this thread over the years, I'm interesting in seeing how the Foresight story ends. Thesis to me was that there was a special situation at the ownership level combined with severe cyclical lows in the industry and a very cheap equity based on the cost structure of their mines. Do things more explicitly shift to a restructuring scenario? Is a lowball offer on the horizon? We shall see...

[heth247]

Wow, today's 2L volume is huge and price halved! I wonder if the company is going to do a debt exchange on the 2L. On the other hand, the ILB price seems to hold well while NAPP and CAPP both dropped a lot. API2 price has bounded back 10%+ from lows. This is puzzling.

[morob]

Wow, today's 2L volume is huge and price halved! I wonder if the company is going to do a debt exchange on the 2L. On the other hand, the ILB price seems to hold well while NAPP and CAPP both dropped a lot. API2 price has bounded back 10%+ from lows. This is puzzling.

 

What could be the reason for this recent collapse in the bond and stock price in the absence of any (publicly available) news? As you mentioned, coal price slump isn't new and there was actually some stabilization in API2. It has to be the fall-out of Cline's passing.

[heth247]

Wow, today's 2L volume is huge and price halved! I wonder if the company is going to do a debt exchange on the 2L. On the other hand, the ILB price seems to hold well while NAPP and CAPP both dropped a lot. API2 price has bounded back 10%+ from lows. This is puzzling.

 

What could be the reason for this recent collapse in the bond and stock price in the absence of any (publicly available) news? As you mentioned, coal price slump isn't new and there was actually some stabilization in API2. It has to be the fall-out of Cline's passing.

 

Probably, but what took them so long... it has been 2 weeks since Cline's death.

[Ismael]

Who do you think Bob called first upon learning the news about Cline?

1. Clines family to give his condolences

2. His bankers to explore options to take the company private

 

[morob]

bottom seems to be falling out on this. A negative earnings report is probably a given as business conditions were generally bad during second quarter and the GP has interest to depress price of common. Pretty incredible how quick things have changed. Is the buyout by Murray practically a given at this point? The fear of such a take out drives the price down and makes the take out even more likely - path dependency.

[heth247]

bottom seems to be falling out on this. A negative earnings report is probably a given as business conditions were generally bad during second quarter and the GP has interest to depress price of common. Pretty incredible how quick things have changed. Is the buyout by Murray practically a given at this point? The fear of such a take out drives the price down and makes the take out even more likely - path dependency.

 

Based on today's ARLP call, it is not that bad. They seem to not worried about the export market and are prepared to dump the volume to the domestic market to squeeze out the high cost producers. They even hiked up dividend.

 

For FELP, the biggest problem is the debt. I still don't buy the idea of buyout of common unit by Murray. If you want to own this company, wouldn't buying up the 2L at 30c right now is the best option?

[Ismael]

If you want to buy these assets don't you need to convince whoever controls Cline's holdings to sell, whether it be common or 2L?  If you are in control of Cline's holdings why would you sell your 2Ls to Bob?  Wouldn't this incentive Bob to wipe out your common?  Wouldn't you prefer to sell the commons so you can gain on both?  Agree that Bob buying out the common is still a big if due to the financing challenge, but if there is ever a time, it is now.  Whoever is in control of Cline's stake probably doesn't have the stomach he did, and there are probably some estate tax issues that need to be dealt with.  What are the chances Bob can partner to come up with the financing?  He would probably be better off sharing the equity with a partner than dealing with the MQD problem. 

 

What ILB price sends this into bankruptcy?  How does it go bankrupt at prices above $35?

[heth247]

What ILB price sends this into bankruptcy?  How does it go bankrupt at prices above $35?

 

Here is an scenario, just for discussion:

 

at netback of $35, and a cost of $23, FELP's ebidta margin drops to $12/ton. Assume 20M tons volume, that is $240MM EBITDA (not adjusted ebitda which includes insurance payment).

 

Against the $240 EBITDA, we have $140MM interest, $60MM CAPEX (maintenance), and $40MM SGA. So FCF drops to zero and no debt paydown and leverage ratio remains the same. This will be an issue when in 2022/2023 when they try to roll the debt. It is very likely that 2L will become the equity at that time.

 

[morob]

What ILB price sends this into bankruptcy?  How does it go bankrupt at prices above $35?

 

Here is an scenario, just for discussion:

 

at netback of $35, and a cost of $23, FELP's ebidta margin drops to $12/ton. Assume 20M tons volume, that is $240MM EBITDA (not adjusted ebitda which includes insurance payment).

 

Against the $240 EBITDA, we have $140MM interest, $60MM CAPEX (maintenance), and $40MM SGA. So FCF drops to zero and no debt paydown and leverage ratio remains the same. This will be an issue when in 2022/2023 when they try to roll the debt. It is very likely that 2L will become the equity at that time.

 

They are doing 20-22 tons now. Don't forget that they will have Hillsboro contributing at a much higher rate at that point.

[heth247]

What ILB price sends this into bankruptcy?  How does it go bankrupt at prices above $35?

 

Here is an scenario, just for discussion:

 

at netback of $35, and a cost of $23, FELP's ebidta margin drops to $12/ton. Assume 20M tons volume, that is $240MM EBITDA (not adjusted ebitda which includes insurance payment).

 

Against the $240 EBITDA, we have $140MM interest, $60MM CAPEX (maintenance), and $40MM SGA. So FCF drops to zero and no debt paydown and leverage ratio remains the same. This will be an issue when in 2022/2023 when they try to roll the debt. It is very likely that 2L will become the equity at that time.

 

They are doing 20-22 tons now. Don't forget that they will have Hillsboro contributing at a much higher rate at that point.

 

I am just trying to think of the worst case and see what is the margin of safety for common units here. 2018 was a record year, with API2 reaching $100/ton, yet FELP's overall margin achieved was $14.22/ton. So I think it is reasonable to assume the margin can go down to $12 or even lower in the next a few years if nat gas price stays low and no recovery in export, and if we got a recession. If demand is not there, I don't know if they can keep the volume at 22 tons, or add another 3~5 tons from Hillsboro without dragging down the margin further. In addition, it is almost August now, and we still have not heard anything about the remaining $60M insurance payment. Without that money, I think it will be difficult for them to restart longwall operation at Hillsboro. 

 

Look, I think common is cheap here, but not sure about the risk, hence the discussion. Hope @Picasso can share some his views.

 

 

[Ismael]

To arrive at today's price the market is putting a high probability on this going to zero (>50%) and not pricing in the optionality around Hillsboro or FELP going private (at a price that is attractive relative to the current trading price).  With Hillsboro up and running it is hard to see how FELP doesn't do well (even in a poor pricing environment), but leaving aside the financing challenge, the problem is that Bob isn't incentivized to invest in Hillsboro in a poor pricing environment because of the MQD problem.  I mean if coal prices go low enough long enough, Bob's best course of action is to light FELP's mines on fire to rationalize supply.  Is the only way to unlock the value in the common to get a favorable pricing environment or buyout offer from Murray?

[newbee]

Felp reported 2Q2019 today

http://investor.foresight.com/file/Index?KeyFile=399085769

[Ismael]

Q2 Conference Call

 

Rob Moore

No, no. We are working toward a plan that would allow us to potentially resume longwall mining operations at Hillsboro. Although we're going to be as I've said before, strategic about how we do that and when we do that.

 

Rob Moore

Well, we are being we're pretty successful right now in terms of taking RFPs that are out there. And we continue to push our product into markets that we haven't been in historically, and we are seeing success there. So, as I've told people with these assets that we have, we can compete against every other basin out there. And with where we're able to produce, that gives us a benefit in terms of getting our coal into the plants if these export markets aren't there, then, we're poised to take domestic share and that's what we're going to do.

 

Rob Moore

Sure. Sure. I think that as I said earlier, I think all basins could benefit from strategic combinations, whether it be through merger in the traditional form or through JV opportunities. And I think there are more entities that are evaluating and considering, those types of transactions. I think people recognize that there is benefit to those types of combinations. So, we're not actively engaged in any discussions, but it's something that, I think, as an industry people are looking at more frequently than they have in the past, and we'll see what transpires over the next three months to 12 months. But, I would expect to see some additional consolidation in the space.

 

Rob’s comments make me skeptical we can count on FELP investing in Longwall ops in Hillsboro unless we see better prices, but it also sounds like they are comfortable taking domestic market share with the capacity they currently have and are open to strategic combinations.  This seems mispriced.  There is a good amount of risk here, but it wouldn’t take too much of an improvement in the market outlook for this to be a 10 bagger +. 

 

[Guest roark33]

Well, it was a 10 bagger before and then lost 90% of its value, so what is that called?  Not a great investment idea? 

[Ismael]

@roak33 Sooo your investment idea is to only invest in stocks that go up?

 

There has been a lot of volatility over the last few years with this one for sure.  FELP has a tremendous amount of leverage that is driving this. 

 

If pricing continues to deteriorate then this FELP will be a zero, but there are a number of scenarios that can really juice this stock by unlocking value through refinancing or getting Hillsboro up and running.  International price increases due to all the coal fired power plants that are being built around the world or global trade picking up would be a nice tailwind.  Likewise, an increase in natural gas pricing in the US or a trump reelection could do a lot to help ILB pricing.  You could also see some sort of strategic combination that could unlock value. 

 

The prospective returns for FELP look very asymmetric to me.  I wish I could find a handful of options like this one that have minimal correlation to one another.  I guess it is only a good investment if it goes up though...

[John Hjorth]

@roak33 Sooo your investment idea is to only invest in stocks that go up?

 

There has been a lot of volatility over the last few years with this one for sure.  FELP has a tremendous amount of leverage that is driving this. 

 

If pricing continues to deteriorate then this FELP will be a zero, but there are a number of scenarios that can really juice this stock by unlocking value through refinancing or getting Hillsboro up and running.  International price increases due to all the coal fired power plants that are being built around the world or global trade picking up would be a nice tailwind.  Likewise, an increase in natural gas pricing in the US or a trump reelection could do a lot to help ILB pricing.  You could also see some sort of strategic combination that could unlock value. 

 

The prospective returns for FELP look very asymmetric to me.  I wish I could find a handful of options like this one that have minimal correlation to one another.  I guess it is only a good investment if it goes up though...

 

Ismael,

 

You wrote it yourself, ref. my emphasis above. How much of your capital are you willing to put on the line here for this venture? To me, this is a doughnut long term. To me, this company does not have a long term future. It's now 3½ years [and ~110 pages here on CoBF] ago Picasso started this topic, based on a situational deep value proposition, however a totally different one than how FELP looks like today. [And naturally also Picasso has moved on.] Those longs who got it right in the first place got a good shot of Fentanyl, the rest for the longs has since then just been a long aile of suffering.

 

I'm not trying to be condescending here, knowingly it will always read so. If you have no real conviction here, why even pest your own existence with some piece of crap where you have to think about getting out every day instead of taking it easy [and making money]?

[Ismael]

@John Hjorth, there are lots of different investment styles and ways to make money, it sounds like this type of investment doesn’t jive with your style which is fine. 

The industry is in cyclical decline in the US, however, it is going to be a significant part of the US energy makeup for decades to come and coal power plants are being built in developing countries at a faster rate than they are getting decommissioned in developed countries.  FELPs mines are at the bottom of the US cost curve so they should be throwing off lots of cash flow for many years to come.  It isn’t entirely certain these cash flows will flow to the current equity holders, however, I can envision plausible outcomes where they do.  The market doesn’t seem to be pricing these positive scenarios into the stock.  I appreciate confirming or disconfirming analysis on this point, but was hoping for better feedback than the company’s message board is 100 pages long and the stock price is volatile so it must be going bankrupt.   

I’ve been following this situation closely since Picasso brought it to the board and think it is interesting again at this price.  The assets haven’t changed, however, the control issue from 2016 is resolved, Hillsboro is no longer on fire and there is the real possibility of reopening it, and the coal price environment is better now than then.  Why is it selling for a third of the price as it was in 2016?  Thanks!

 

[RadMan24]

@John Hjorth, there are lots of different investment styles and ways to make money, it sounds like this type of investment doesn’t jive with your style which is fine. 

The industry is in cyclical decline in the US, however, it is going to be a significant part of the US energy makeup for decades to come and coal power plants are being built in developing countries at a faster rate than they are getting decommissioned in developed countries.  FELPs mines are at the bottom of the US cost curve so they should be throwing off lots of cash flow for many years to come.  It isn’t entirely certain these cash flows will flow to the current equity holders, however, I can envision plausible outcomes where they do.  The market doesn’t seem to be pricing these positive scenarios into the stock.  I appreciate confirming or disconfirming analysis on this point, but was hoping for better feedback than the company’s message board is 100 pages long and the stock price is volatile so it must be going bankrupt.   

I’ve been following this situation closely since Picasso brought it to the board and think it is interesting again at this price.  The assets haven’t changed, however, the control issue from 2016 is resolved, Hillsboro is no longer on fire and there is the real possibility of reopening it, and the coal price environment is better now than then.  Why is it selling for a third of the price as it was in 2016?  Thanks!

 

I've followed coal for a long time, and rarely commented on this thread, and there was a time when it could have worked out, but things fell apart pretty quickly. For what its worth, HCC is the coal you want to be in, at least over the past few years. Warrior Met Coal for example has paid out numerous special dividends and maintained the balance sheet. Thermal coal is just not appeasing, no matter what the cost curve is, because the industry is struggling. Who knows what happens when ARch/Peabody combine their operations, that's a ton of scale.

 

I'd just hone your attention to pure play met coal, or materials related to recycled steel like graphite electrodes.

 

 

 

 

[Spekulatius]

@John Hjorth, there are lots of different investment styles and ways to make money, it sounds like this type of investment doesn’t jive with your style which is fine. 

The industry is in cyclical decline in the US, however, it is going to be a significant part of the US energy makeup for decades to come and coal power plants are being built in developing countries at a faster rate than they are getting decommissioned in developed countries.  FELPs mines are at the bottom of the US cost curve so they should be throwing off lots of cash flow for many years to come.  It isn’t entirely certain these cash flows will flow to the current equity holders, however, I can envision plausible outcomes where they do.  The market doesn’t seem to be pricing these positive scenarios into the stock.  I appreciate confirming or disconfirming analysis on this point, but was hoping for better feedback than the company’s message board is 100 pages long and the stock price is volatile so it must be going bankrupt.   

I’ve been following this situation closely since Picasso brought it to the board and think it is interesting again at this price.  The assets haven’t changed, however, the control issue from 2016 is resolved, Hillsboro is no longer on fire and there is the real possibility of reopening it, and the coal price environment is better now than then.  Why is it selling for a third of the price as it was in 2016?  Thanks!

 

The fact that coal plants are being build in development countries (probably true, but even China deemphasizes coal power nowadays) is irrelevant, because coal will be sourced locally, since it is simply not worth transporting far (too little value for the tonnage).

 

Metallurgical als coal used for steel production is roughly 5x+ more expensive per ton and henc is worthwhile to transport where it is needed.

[Ismael]

Most who have followed this situation probably agree that there is a lot of value in FELPs assets, however, the equity holders cant get to it because of the debt overhang.  At a high level there are two paths that solve this debt overhang problem.  Restructure and/or price goodness.  Picasso explained possible restructuring scenarios on this thread a few months ago.  In the discussion there was skepticism that the restructuring could be financed with pure debt, but at least Murray is incentivized to do it outside of bankruptcy.  How probable is it that there’s a partner out there who would work with Murray to help raise the financing or would any possible partner be better off waiting to see if FELP goes bankrupt?  Let’s say ALRP is considering partnering.  If they wait to see if FELP goes bankrupt, they may be able to avoid Hillsboro volumes hitting the market until FELP debtors take the company (if no one else helps with the financing).  On the other hand they could help with the financing and get a piece of Hillsboro/FELP.  Either way the volumes are going to hit the market.  Why not get a piece of it?

Of course, high prices fix the problem too.  The Peabody partnership is probably good for pricing.  SGA is a tiny percentage of the cost structure and most of the mining is done with machines so there wont be a lot of opportunity to remove costs.  The partnership seems to be more about making sure coal producers act rationally to manage the secular decline in demand in the states.  Due to the shipping costs Spek mentioned US prices are somewhat insulated from global prices so we shouldn’t see a big pickup in US prices if global prices pick up, however, FELP was placing profitable orders abroad when the prices were high.  If global prices increase, FELP may be able to land a long term contract for the Hillsboro volumes without impacting domestic prices (which Murray is sensitive to).  Additionally, around 10% of US volumes are exported abroad.  If those exports are unprofitable, then they are probably looking for a home in the US and pressuring US prices. 

Right now the market is putting a very low probability on FELP fixing its debt overhand problem.  Is it right?

 

[Guest roark33]

http://www.snl.com/Cache/c400007811.html

 

Usually the step before bankruptcy.