FELP - Foresight Energy

[Picasso]

Okay some more details now that the little guy fell asleep.

 

Right off the bat, units are going from 130 million to 140 million under this proposal.  As suspected, the senior lenders are comfortable with this agreement so we need to look at whether 67% of the note holders will take the terms. 

 

For every $101 owed, note holders are getting the following:

 

$16 of cash

$50 of 9% 2nd lien notes

$50 of 15% 2nd lien convertible PIK notes

 

Question is where those two notes should trade because that obviously adds up to $116.  My guess is near par (say $45) for the 9% cash pays and maybe $40 for the PIK's.  That would actually get you a total of $101.  How cool...

 

Plus Cline is taking the bulk of the 15% PIK's which lets the other noteholders take primarily more liquid 9% cash pays.  The cash pays are slightly senior to the cash pays (if they can't refi the debt in a year, it gets swapped for a bunch of new units plus it will be the only 2nd liens when the bridge PIK's get refinanced). 

 

So there are now two stages to this short-term trade.

 

One is the market reaction to the senior lender/FELP term sheet.  That in itself is a big positive and the terms look attractive to this bystander.  It makes the idiot who sold the notes last week at $61 look even more silly...  Anyway.  I think it's enough to push the units up to $3.

 

Then you have to get the bulk of the note holders to approve it, and that can probably send the units up another leg to say $4.  At $4 you have a newly diluted market cap of $560 million or 4x 2015 DCF. 

 

My guess is dividends can get back to maybe $0.10 now that there's a sweep option to reduce leverage on 50% of DCF.  It would still yield around 10% at $4 in that situation.  Is that too low a yield for these units?  Maybe, I don't know.  Plus you might see some new stock issuance in the future ahead of the bridge PIK.

 

There are some other interesting parts to this but that's a good summary for now. 

[awindenberger]

Thanks for the additional color Picasso, I hope your wife gets better fast.

 

Whats interesting to me is the dividend situation. As you mentioned, they could probably start a $.10/quarter dividend again after this. However, due to the fact that the Minimum Quarterly Dividend (MQD) is $.3375, each quarter they don't pay that amount puts them further into arrearage on the dividends. Clearly, Murray would like to fix that situation as quickly as possible, given that they need to pay at least the MQD for 3 years straight in order for Murray to get paid on their subordinated shares.

 

Right now they have arrearages of about $.50/share built up. If they don't pay anything in May, that will be boosted to $.83/share.

 

How do you see the dividend situation will play out?

[Picasso]

I'm not sure the MQD's mean anything at this point.  They need to survive and come out the other side before Murray can even start thinking about getting paid.  He might be dead by then?  And the cash sweep limits the distribution for a couple years.  Plus coal is going to be tough for at least a couple years so they should be paying down debt with excess free cash just in case.

 

I do wonder if this stays cheap because half the free cash is used for debt repayment and investors will value it on the dividend. 

[awindenberger]

I managed to double my position at $2 on the open, looks like your prediction of $3/share might even happen today Picasso.

 

I imagine you were taking some profits as it hit over $2.50 given the size of your position?

[Picasso]

Not selling yet, there are still some upcoming catalysts and it isn't an expensive stock even at $2.50.

[awindenberger]

Also, I found it interesting that Murray Energy needs to exercise their option to buy the 46% additional stake in Foresight GP in order to be able to take out the convertible notes. This seems to imply that Murray is likely to make a stock offer to take out FELP common stakeholders at some point this year.

[wachtwoord]

I'm still holding so maybe too soon to say thank you, but last Friday I also started a position @$1.60 (a normal sized one as my knowledge on the situation is not on par with yours, it just seems to make a lot of sense). Thanks for sharing Picasso!

[PullTheTrigger]

Interesting that it's back down to $2.

 

Fidelity blowing out of it's position maybe.

[Picasso]

Darn you Fidelity! You and your diabolical plans to limit my gains on this beautiful morning.  Have you no decency or manners?  Have you not had ample opportunity to sell your shares before?  Does staring at the FELP position in your crappy mutual fund bother you that badly? 

 

The nerve of those guys  :)

[wachtwoord]

I added to my position this morning at $2.06.

[Patmo]

I am surprised the market response has been so muted... Teck is up just as much today based on no news as far as I am aware ...

 

Not a big whoop, I was expecting stupider action though, like a jump to 5 then back down to 2 over 3 days... Market playing it safe imo, taking its time to digest the news correctly before making big decisions

[Picasso]

The note holders still need to take the offer so I think the market could be waiting to see if that happens.  The senior lenders agreed to those terms (which is why we saw that 3-month extension before the weekend) but it's still to be seen whether the note holders take that cash and debt swap.  I sort of estimated pricing on the pieces and don't think they would say no.  The test will be where the notes trade.  I'd like to see something around $95.  So far no activity on the notes.

 

The other cue I'm looking for is spot ILB coal pricing.  It should start moving up soon from $31.70 if my thoughts on the supply/demand picture are right.  Just something to monitor besides production numbers which are down anywhere between 20-30%.

 

And earnings are May 5th so we can get an idea for how much cash they generated (if any) and what costs look like.  It's not quite over yet even though this senior lender agreement is probably half the battle.

[Picasso]

I took some recent JPM sell-side estimates on FELP EBITDA and they have about $75 million of distributable cash flow for 2016.  That's down from about $100 million in their estimates from late last year.  If you add in the newly diluted shares on those estimates, it's already trading for 4x DCF with DCF down by nearly half over the past year.  And maybe 6.5x EV/EBITDA.  My whole thing is, I don't think valuing this on 2015/2016 DCF is appropriate and so maybe it just takes time to work its way out.  It's already doubled from the lows and I'm seeing 5-6x DCF multiples on the likes of CNXC or ARLP.  IMO, FELP is better than CNXC or ARLP but maybe the market wants to see whether that is true before giving it a higher multiple.

 

And the JPM estimates used about $13 margins per ton if I take volumes that are already contracted in 2016.  We need to see whether those margins will hold up or if costs can't be held under $23/24 per ton.

[Picasso]

Sorry one last thing.

 

This is a generally more difficult investment in the sense that there are really two investment ideas built into one.  The first is, the debt issue needs to be settled.  The stock was trading around $1 because people thought it was going into bankruptcy.  The second is, this is probably the best publicly traded coal company.  So if it has a 50% chance at being one of the bigger coal players in several years, getting it for say $200 million in an equity stub was a steal.  I don't know if I'm right on the second part of the thesis but if they were willing to work this hard to get the debt deal done (aside from Cline wanting to avoid lawsuits or Murray wanting to survive a bit longer) then it fits with the idea that it is something worth saving.  You don't go through this much effort if it's some garbage asset. 

 

I may end up selling it if I don't see enough evidence for this being a good long-term coal stock, but it's something that I think I have time to consider...  I bought LVS at $3/4 and sold it at $8 thinking I was a smart guy, but it made a lot more sense to just hold it.  It would be fun to see this ratchet higher very quickly but I think I'm getting about a 40% yield on my cost near the bottom of the cycle.

 

Anyway just some of my thoughts.

[Patmo]

What are your thoughts on supply/demand?

[PullTheTrigger]

I found an article about coal plant shutdowns. Interesting article, but at the end of the article, it talks about how pressure on coal lessens after 2020:

 

At the end of 2012, there were 1,308 coal-fired power generating units spread across 557 power plant sites in the U.S. with the total capacity to generate 310 gigawatts of electricity. That year, 10.2 gigawatts of coal-fired capacity were retired, or 3.2 percent of 2011 capacity. Most of the plants that were taken offline in 2010, 2011 and 2012 were small, averaging 97 megawatts each, EIA data show.

 

The agency expects long-term pressure on coal plants to ease after 2020.

 

“Post-2020, demand for electricity in our projections increases as well as natural gas prices,” EIA analyst Michael Leff said. “Therefore, there is less long-term economic pressure on coal post-2020, barring no future regulations.”

 

http://www.climatecentral.org/news/flurry-of-coal-power-plant-shutdowns-expected-by-2016-17086

 

Of course this article was from 2014 and they were probably expecting ng prices to recover.

 

 

Here's a Jan 2016 update by the EIA:

 

https://www.eia.gov/electricity/monthly/update/resource_use.cfm

 

For the thirteenth consecutive month, the price of natural gas at Henry Hub was below the price of Central Appalachian coal on a $/MWh basis. However, the spread between the two prices decreased significantly, mainly due to the large increase in the price of natural gas at Henry Hub. The price of natural gas at New York City on a $/MWh basis was above the price of Central Appalachian coal for the first time since March 2015, due to the large increase in the price of natural gas at New York City.

 

The conversion shown in this chart is done for illustrative purposes only. The competition between coal and natural gas to produce electricity is more complex. It involves delivered prices and emission costs, the terms of fuel supply contracts, and the workings of fuel markets.

[Picasso]

This was also an interesting presentation from 2012/2013.

http://www.howardweil.com/docs/reports/otherreports/ilbprimer-10-08-13.pdf

 

Obviously some changes since then, but you can see the cash costs across various players, who owns the big reserves, etc. When you look at that and compare it to the now falling production and falling prices, I don't see how ILB spot prices stay at 31.70. Foresight would be one of the few that could actually earn some free cash at these prices but most of that would be eaten up in interest expense.

[Green King]

Thanks for the info. I found a more current one after i saw yours. http://www.halladorenergy.com/Cache/1500079886.PDF?O=PDF&T=&Y=&D=&FID=1500079886&iid=4187964

they don't say the names but on page 5 they give production and cash cost of the players. Foresight energy should be #1 on the chart.

[Picasso]

Hmm, this is a bit odd.  The notes finally traded today ($250k piece) at $65.  I would have expected pricing much better than that.  The market still waiting to see if it gets approval?  I don't see how the two new 2nd lien notes would only add up to $49 of par when you take out the cash consideration.  Especially when half of them could convert to equity in a dire outcome.  Could be the market being inefficient yet again but I don't know.  I'll have to go into the market and pretend like I'm a buyer to see where they are being offered.

[awindenberger]

I'm def curious to hear your results Picasso.

[odin]

I'm covered by the firm that traded the 500k yesterday. They are looking for more but no indication on size. Two days ago a different shop had a seller of 1-2mm indicated around 70.

 

FWIW, the loan is bid at 82.5 for size

[Picasso]

I'm hearing 69-70 on 1mm as well.  Not sure what to make of that but that's really cheap if this debt swap and partial tender go through. 

 

Are you a buyer of those notes Odin or any thoughts?

[Picasso]

I forgot that Cline was taking 180 million of the one year PIK's, so those notes will get the following:

 

$16 of cash

$20 of 1 year PIK

$80 of 2021 9% 2nd liens

 

The PIK should be worth close to face because it's 15% on one year with a deep in the money equity conversion if it doesn't get refinanced.  That would leave $34 of value (for a note buyer today at $70) for the $80 of 2021 2nd liens.  Why would those 2nd lien notes be trading at an implied price of $42.5? 

[odin]

Great point Picasso on the implied price. 

 

It's clearly a complicated situation - maybe not worth the time when so many E&P bonds (among other sectors) were super distressed a few weeks ago? 

 

I haven't had the time to look at it closely myself, but it looks really interesting.  Thanks for bringing the idea to the board.

[Picasso]

I've seen some weird pricing inefficiency in some more complicated situations, like a Sears rights offering for a note/warrant combination that effectively gave you the notes for free if you matched up the warrants to the implied volatility of the listed options, so maybe that's the case here too.  I don't see how having notes senior to Cline with the potential for $300 million of debt reduction in a year should warrant a price of $42 or so.  There are also provisions so that any debt refinance of the 1 year PIK can't fall inside 2021 or bear any cash coupons.  Those $300 million of 2nd liens would seem to be very well protected.