Author Topic: CTRA - Contura Energy  (Read 2089 times)

peterHK

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CTRA - Contura Energy
« on: July 05, 2019, 06:18:53 PM »
I am a self admitted bagholder on this one, but as it's been SO beaten up I thought I'd mention it.

On today's $980mn market cap CTRA will do ~$250mn of free cash to the equity. They have  a $250 million buyback authorization and the CFO said on the last call that the math shows pretty clearly buybacks are the things to do.

90% of their EBITDA comes from met coal, the rest comes from thermal & shipping, but those businesses are fairly marginal in terms of profitability. This is the largest coal producer in the US, so there are some scale advantages there, but relative to other places in the world, it's not low cost. Met coal is a decent business: it's unattractive environmentally, nobody is bringing on supply, India is ramping up buying, and China demand is relatively stable.

The CEO who led this into bankruptcy was recently fired/moved on, and the board is comprised of the bondholders in the bankruptcy. My guess is they aren't pleased with how this has turned out as shares have gone nowhere for years. The old CEO (who was an empire builder; part of why the company went bankrupt in the first place) did a very stupid acquisition in acquiring the old assets that were separated in the badco post BK (Contura was the goodco), but that's now sunk cost. My sense is that the CFO is actually a decently sharp fellow, and he's in charge now, so i think the risk of more incredibly stupid things being done are low.

Cap structure right now is ~$980mn of equity, $1.3bn of liabilities (debt & ARO/pension) offset by $480mn of restricted and unrestricted cash. Some of that restricted cash will become unrestricted over time.

I think the company will do ~$250mn of FCF this year, $225 next year, $175 the year after that and maybe $100-125 after that as I assume met prices fall ~15% from today. That means in the next 3 years they'll generate most of the market cap in cash. Of course with any commodity company, it's all up in the air.

Right now the warrants (CNTWW) are a little cheap, and adjust their terms in the case of a dividend, so capital returns will accrue to you regardless of the form.

Today, based on a DCF of the cash flows outlined above, with a terminal value on $100mn of FCF using a 10% WACC and -5% terminal growth, I get ~$60 in value for the company. If they use all their cash flows to buy back shares, then by next year this is a $70 stock. In that case the warrants are more than a double. I think at today's prices the risk of a permanent capital loss is probably fairly limited, so risk reward here is favorable, but moreso on teh warrants at $16 if you can get them there, than on the stock.

Q1 was sort of an ugly quarter, lot of one time issues, so if cash generation is better in Q2, and they announce a large buyback, there's your catalyst that could send this to $60.

This isn't an investment, it's a case of mispricing I think, but this is not a company I would hold for the LT: it's a capital intensive deep deep cyclical in an industry that is not particularly attractive. My own cost base is in the $60 range, so I won't make money on this (I don't think), but there's an opportunity to take it from here and make a decent go of it I think.

Warrants: https://seekingalpha.com/article/4204351-contura-energy-warrants-double-discounts-2_5x-returns
CTRA: https://seekingalpha.com/article/4183154-contura-energy-astonishing-50-percent-fcf-yield-management-intends-pay-shareholders
VIC Writeup: https://www.valueinvestorsclub.com/idea/Contura_Energy_Inc/8166326954




cameronfen

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Re: CTRA - Contura Energy
« Reply #1 on: July 05, 2019, 08:56:12 PM »
Bagholder on this as well. 

valuedontlie

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Re: CTRA - Contura Energy
« Reply #2 on: July 11, 2019, 05:54:06 PM »
That's a pretty steep fall-off you're predicting over the next few years...

Whenever I see these situations I wonder to myself if large special (i.e. variable) dividends are the way to go... if, as you say, in 3-4 years they are still generating decent cash flow, then you'll at least have received nearly the entire share price in cumulative dividends while still holding on for some smaller terminal value in the future...

peterHK

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Re: CTRA - Contura Energy
« Reply #3 on: July 12, 2019, 07:38:49 AM »
That's a pretty steep fall-off you're predicting over the next few years...

Whenever I see these situations I wonder to myself if large special (i.e. variable) dividends are the way to go... if, as you say, in 3-4 years they are still generating decent cash flow, then you'll at least have received nearly the entire share price in cumulative dividends while still holding on for some smaller terminal value in the future...

Consensus assumes a pretty steep fall off, and indeed there's a very good question about whether met coal prices can stay where they are. I don't want to bank on it but certainly if they do, this stock is absurdly cheap today.

Regarding dividends, I think at this share price it actually makes way more sense for them to buy back shares. They can finance the buybacks with debt at like 8%, and the shares are trading at a 25%+ FCF yield, so the spread on that creates enormous value for every share you buy.

Dalal.Holdings

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Re: CTRA - Contura Energy
« Reply #4 on: July 12, 2019, 09:02:22 AM »
Regardless of what consensus thinks about coal prices, supply is coming offline and demand likely growing/stable:  metallurgic coal will still be needed, particularly in emerging places like India with steel needs.

Seems like an asymmetric play here with some downside protection given the relatively cheap value. Barring a global recession, this might not be a bad bet. Coal supplies getting tighter and should there be some kind of supply disruption, met coal prices could soar in a squeeze type situation.

valuedontlie

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Re: CTRA - Contura Energy
« Reply #5 on: July 12, 2019, 09:12:30 AM »
I hear that argument a lot on the dividends vs. buybacks... it just seems too tough a call to look out a few years in these declining businesses and say confidently that it's the right choice... Outerwall (i.e. redbox) was a great example of buying back stock hand over fist at a high FCF yield yet the stock was a dog for years until it got bought out... at a price that was flat over a 6-ish year period nonetheless...

If cash flow drops by 50-60% in 2-3 years then buying shares at today's 25% FCF yield doesn't equate to a great plan... just my preference...

I'd buy a heck of a lot more secular decliners if they simply paid out all earnings as dividends in a variable fashion until they went kaput...

peterHK

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Re: CTRA - Contura Energy
« Reply #6 on: July 12, 2019, 04:45:17 PM »
The other wrinkle that just came up is $247mn of ARO liabilities that CTRA basically transferred to Blackjewel which has now gone bankrupt. THe permits are still held by Contura, meaning that they're likely still on the hook for this liability.

More good news lol.
« Last Edit: July 12, 2019, 05:04:05 PM by peterHK »

Foreign Tuffett

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Re: CTRA - Contura Energy
« Reply #7 on: July 13, 2019, 10:31:31 AM »

FF4F

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Re: CTRA - Contura Energy
« Reply #8 on: July 15, 2019, 08:12:42 AM »
Do you have a good information source to keep an eye on Met coal prices (and to a lesser extent Thermal coal prices)?

I am no expert at Coal, and there seem to be a lot of different price points, and not a lot of free available data sources to monitor them...

What do you use?

Cheers
JG

peterHK

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Re: CTRA - Contura Energy
« Reply #9 on: July 15, 2019, 08:42:26 AM »
They all trade somewhat differently, but the closest thing I've found is this:

https://www.cmegroup.com/trading/energy/coal/australian-coking-coal-platts-low-vol-swap.html