FELP - Foresight Energy

[PullTheTrigger]

No news is bad news?

[Picasso]

I don't think so, but I'm so close to the situation that I could be off. If you remember the last time we had that two day extension, then another two week extension which threw us off, but the next business day was the support agreement. My inclination is they announce the note holder transaction agreement on Monday and it's not neccesary to announce another extension today. They could have announced the note holder agreement today, but the deadline runs through the end of today and when I looked at past filings from the 2015 consent they announced it the following business day. So not unusual.

[PullTheTrigger]

Thanks. Not unusual, but definitely uncomfortable.

[Picasso]

I think that uncomfortable nature of this stock is why it's still debatably really cheap and the notes were still trading at $65 or $70. I was asking myself before why it's still this low when half the share count isn't entitled to earnings for a while, and then I put myself in a prospective shareholders shoes and it makes more sense. This is a super hairy situation but ultimately I think it gets worked out nicely.

[bigbadwolf]

8-k out

[wachtwoord]

Another extension.

[Picasso]

So now it changed from a two week extension to a one week extension, and they did an amendment to the support agreement to give them another week.  I need to call someone to figure out how long it takes to put together one of these transaction support agreements.  My guess is a few days so a weekly extension isn't about negotiating deal points but mostly more time to create the agreement.  If it's still about negotiating deal points then we're back to weekly waterboardings, but I'd think they would have done a two week extension if that were the case.

[PullTheTrigger]

I'm more pessimistic and assume it's a negotiation issue. Are these agreements hundreds of pages long? I would think similar agreements would be done in the past and it's just a matter of changing the language specific to the parties.

[hswoon]

felp holders' money right now:

http://i.imgur.com/wEcx2Jj.gifv

[Picasso]

I'm more pessimistic and assume it's a negotiation issue. Are these agreements hundreds of pages long? I would think similar agreements would be done in the past and it's just a matter of changing the language specific to the parties.

 

You might be right.  I'm kind of leaning in your direction that they might want to get a bit more out of the swap.  Maybe Cline tenders for more than $106 million or he takes some of the 2021 2nd liens as well.  Another 5 pts on the deal is $30 million which doesn't sound like a difficult gap to bridge.  But I'll find out how long it might take to draft this up considering there are several parties involved.

[Guest roark33]

Picasso,

None of these documents take long to draft.  I am not saying it is a negative, but if FELP's lawyers draft the documents to their liking and send them around for execution, this stuff can be done by an army of associate lawyers in one weekend.  What's most likely happening is that each of the 15 different parties (or however many there are) are asking for their own specific deal points and with a MFN-type agreement, you need uniformity. 

[Picasso]

FWIW, I've been speaking to some restructuring lawyers about FELP over the last day.

 

I've heard the following:

 

FELP lost money in 2015, sales are down, the industry isn't going to turn, and refinancing the notes will be too difficult. One brought up how they worked on some deals where they simply had to give away the coal asset in some kind of a restructuring. I've already seen SXC pay someone to take their coal business, but that's not really relevant to FELP's assets.

 

I can see how that market perception has shaped the price here. I wish I had talked to some of these guys before because the fear is quite palpable. The investment makes sense to me but less so to others.

[PullTheTrigger]

...the industry isn't going to turn.

 

Is this realistic or just short-term thinking? Utilities can't shut off coal overnight.

 

I wish I had talked to some of these guys before because the fear is quite palpable.

 

You would have changed your decision?

 

Regardless of the long-term survive-ability of FELP, wasn't this always just a bet on working out some agreement with the bond holders and lenders?

[Picasso]

No, I would have bought even more in the lower $1's.  But I think it's a better risk reward now because we have the senior lender agreement and I have a better idea of what the outcome will be.  In many ways it's a better buy at $1.70 than it was at $1.10.  I see it like money just sitting there waiting to be picked up and hardly anyone wants to grab it.... I could be totally wrong but I don't think I am.  I've also decided that this will be a longer term holding and I probably won't sell any shares once the deal is completely done.  Unless it overshoots on the upside because of the small float or whatever.

[Picasso]

By the way, I don't think I posted this article on the thread.  It's from 2010 but sort of amazing to see what has changed since then. 

 

http://www.bloomberg.com/news/articles/2010-10-12/cline-talking-clean-as-coal-mines-supply-most-energy-since-1970

 

A few cool excerpts:

 

“I never had a problem going ‘all in’ in a card game,” says Cline, 52, who is tieless in a blue shirt and chinos as he recalls his gamble on this June morning at his Pond Creek mine outside Marion, Illinois, 320 miles (515 kilometers) southwest of Chicago.

 

“Chris knows how to mine coal,” says Nick Carter, president of Natural Resource Partners LP, a Houston-based owner of coal reserves, who has provided Cline with $315 million in financing since 2005 and has promised $205 million more. “I want him gambling with my money.”

Cline says he aspires to run the safest, most efficient and most environmentally friendly U.S. coal company. If he achieves those goals, he says, profits will follow.

 

Illinois was still a big bet when Cline went “all in” in

2002. An EPA crackdown to limit acid rain, starting with the Clean Air Act of 1990, had cut the state’s coal output to its lowest level since the Great Depression. Exxon Mobil Corp., which mined coal in addition to drilling oil, was closing mines from West Virginia to the Rocky Mountains and joining Chevron Corp. and others in abandoning Illinois.

“Chris was willing to take more risk than we were,” says Robb Turner, co-founder of Boston hedge fund ArcLight Capital Partners LLC. Turner purchased West Virginia mines from Cline but declined to invest in Illinois because he expected meager profits.

 

But the whole thing is worth a read.

[PullTheTrigger]

Thanks for sharing the Cline article from 2010.

 

Unless it overshoots on the upside because of the small float or whatever.

 

What would be overshooting in your opinion? $4? $5?

[Picasso]

Their impression was that this is a super crappy situation and it can easily fall apart. 

 

I might sell some if it jumped over $5.  There will be a rights offering in the near future so there's some limitation as to how much it can move in the short-term.  Because of the subordinated share class, Murray will be better off by doing a rights offering at the highest price possible.  But that can weigh on the units in the short term.  It's reflexive in that the better the units perform, the better the outcome in a year for repaying those PIK's.  So expect super volatility.  Half the dilution will go to the subordinated units but I've seen some investors reference the 75% dilution on the PIK conversion feature.  There's just no way we see 75% dilution unless Murray really wants to destroy his investment.  He'll just need to come up with about $150 million to save his big investment.

 

And as an example, if they do a rights offering at $4 for $300 million you'll add 75 million units.  But half will be subordinated.  So you take the current 65 million + 37.5 million + 9.5 million (warrants as part of PIK redemption) to get 112 million potential common units.  Interest expense will drop by around $20 million so if they were doing $75 million of trough DCF with the $600 million of debt, maybe it's now $95 million.  That would imply about 0.85 of DCF per common unit.  Murray is a bit away from his MQD's in that situation but they're within earshot.  If you see a rights offering at $2 then the math doesn't work that well and Murray is screwed.  The common unit holders basically take control of all the DCF and Murray has a $1.4 billion deep OTM call option on coal. 

[PullTheTrigger]

Again thanks for your thoughts and analysis! You're probably sick of my questions.

 

Their impression was that this is a super crappy situation and it can easily fall apart.

 

I bought shares in late March, so I keep debating whether to take some/all my profits and run. Just trying to handicap this situation.

 

Let's say the lawyers' impressions are correct and things fall apart. Who benefits? As you said once, there's too much mutually assured destruction, I would think.

 

Anyway, I appreciate your analysis.

[Picasso]

Yeah so cash costs in the 1Q were under $24 per ton with a $13 margin.  Costs have really come down from the 4Q when Rasputin mentioned the $28 of costs per ton.  And the 1Q of 2015 had Hillsboro running so not a huge shift in the operating costs (up from $22).  But it's pretty good to see such a low produced tons sold and yet cash costs are still incredibly low.

 

Close to $10 million of legal fees on this bond restructuring.  Those guys are getting Murray coming (screwed up change of control) and going (credit restructuring).

 

If you take the contracted volume for 2016, 19 million tons @ $13 margins then 2016 adjusted EBITDA is around $250 million.  Maybe $50 million of DCF under the current cost structure, and $70 million of DCF under the proposed cost structure with dilution to repay the PIK's.

[Elah_Cix]

Didn't the cash cost get impacted by the MVC payment?

[Picasso]

I believe it adds about $1 per ton on current shortfalls. Hedges run off the next year so that may stay elevated. You're referring to the Convent terminal correct?

[sampr01]

I believe it adds about $1 per ton on current shortfalls. Hedges run off the next year so that may stay elevated. You're referring to the Convent terminal correct?

 

Hi Picasso

 

Are you worried about this on 8-K?

 

The negotiations between the Partnership and its affiliates and the creditors, equityholders and other stakeholders of the Partnership concerning the terms of the proposed Restructuring transactions are ongoing and have not been  finalized. The Partnership is in active negotiations with the holders of the 2021 Senior Notes but has not reached an agreement with them on the terms of the restructuring, including the terms of the Lender TSA. There can be no assurance that the Partnership will reach an agreement with the noteholders by May 17, 2016 nor can there be any assurance that any of the foregoing parties to whom such Restructuring transactions have been proposed will agree to the terms of any such transactions in accordance with the terms described herein, or if at all. The other creditors and stakeholders of the Partnership and its affiliates who are not party to the Lender  TSA have not approved or agreed (either implicitly  or explicitly) to the terms of the Restructuring  and are not bound to take (or refrain  from taking) any actions as a result of the execution of the Lender TSA.

[Picasso]

Nope, that's what we've known all along. 

[wachtwoord]

This is slowly getting a larger position for me. This morning I picked some more up at $1.35.

[gadfly]

Anyone have an opinion on the revenue miss? The 10Q named the usual suspects (nat gas prices and mild weather). They did say international sales were down.. anyone know roughly how much they sell internationally? 

 

19 million contracted for 2016 and only 3,737 sold this quarter. Could the 19 million number go materially lower because of customer renegotiations?

 

Did the recent 10Q and continued rough performance affect what's going on behind the scenes with regards to the debt restructuring?

 

Thanks! I joined the board just for the FELP discussion.