Author Topic: FELP - Foresight Energy  (Read 270098 times)

morob

  • Newbie
  • *
  • Posts: 22
Re: FELP - Foresight Energy
« Reply #1060 on: May 13, 2019, 01:39:55 PM »
the take under scenario sounds compelling but perhaps the cancellation of the dividend has a much more simple reason than a change of shareholder friendliness. On the call More said that excess cash flow will be around 45M and at the midpoint of the guidance they will be again over 4x on the secured leverage. It follows that the excess cash sweep rises again to 75% if their guidance is correct. Of course, there might be some insurance proceeds which could change the picture but without them there would only be around 11M available for distributions. It kind of makes sense that they cancelled it given the situation, take under plans or not.

Actually I think Moore was being a bit too optimistic when he guided $45M excess cash flow. Here is what I got:
    $280 (mid pt ebitda) - $140 (interest) - $78 (mid pt capex) - $34 (longwall finance) = 28M

Without insurance proceed or more volumes from either export or Hillsboro, there is no way for them to do $45M excess cash flow for 2019. 

I remember a year ago, Moore commented on CC that he thought FELP would delever to 2.75X within the next 18 months or so. But here we are, back to 4X at the end of 2019. I guess this commodity business is really tough, even themselves could not have thought that things would have turned bad so quickly.

It got bad quickly because they couldn't deliver on 1-2M tons due to the weather/river issues. With all likelihood this should normalize in the second half of the year. It certainly shows the diverse vulnerabilities of the business but it is not a permanent factor depressing their ability to generate cash. I might sound like a bag holder but given that most business variables are better today than in 2016 and there aren't currently any creditors trying to accelerate, it is a bit surprising (to me) that the stock price has fallen so fast to levels below 2016. I guess a levered coal play with controlling shareholders who would love to squeeze out common shareholders doesn't have any reasonable valuation reference. To me this seems nowhere close to a zero in the foreseeable future (famous last words). But where should it trade give current uncertainties? Who is the marginal buyer of the stock, if there is one?


gadfly

  • Jr. Member
  • **
  • Posts: 51
Re: FELP - Foresight Energy
« Reply #1061 on: May 13, 2019, 07:20:15 PM »
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.

Thanks for the long response Picasso.

With new normal cash costs looking like $24 per ton and export netbacks, at least temporarily, in the high 20s or low 30s, things are looking dire. The whole idea with FELP was that the $21ish cash cost meant they could carry higher debt comfortably, but with the above situation maybe here for awhile, it just looks like there is too much debt...interest expense will consume almost all post maintenance capex FCF.  On 21 million tons they need netbacks to be above $35.30 to have any money flow to equity, and we could see netbacks go sub $36 for the rest of the year if the export market stays tough.   

As for the take under angle. I feel like FELP may be able to buy some debt here and there, but I don't see how it will make a difference. The only possible situation that would move the needle is if they have line of sight on a large insurance payment that could put a big dent in 2Ls or the common units.

I don't see Cline selling in this market, and that's all that matters in terms of Murray getting a shot at bringing the whole thing under MURREN. Cline would probably rather Murray defaults so he can take control of the asset again through his 2Ls/term holdings.

Stinks for common unit holders; creditors will get most the cash flow and probably demand a pound of flesh ahead of a refi while Cline collects his royalties and Murray his MSA (and god knows what else). If markets don't improve it's easy to see how common unit holders are done. But again if we get back to last year's market and Hillsboro ramps then everything is fine. So looking pretty binary, in two years its likely a zero or worth more than $4.

gadfly

  • Jr. Member
  • **
  • Posts: 51
Re: FELP - Foresight Energy
« Reply #1062 on: May 14, 2019, 05:44:10 PM »
What happens if this gets delisted? Does that trip any of the covenants? In a reverse split what happens to the MQDs?

heth247

  • Hero Member
  • *****
  • Posts: 559
Re: FELP - Foresight Energy
« Reply #1063 on: May 15, 2019, 11:07:21 AM »
What happens if this gets delisted? Does that trip any of the covenants? In a reverse split what happens to the MQDs?

I would ask IR about the MQDs. I think the CFO has taken over the job of IR, and he usually responds quickly for questions he want to answer.

But the more concerning thing to me is that the 2L, for the first time, has dipped below 70 today, on 1MM+ volume. I would have thought the suspension of the common distribution would help the 2L, but it didn't. Well, if that was Moore's intention to talk down the 2L price, he certainly has done it. Hopefully the company is buying, although we don't know how much they can buy (they wouldn't disclose it on the CC).

morob

  • Newbie
  • *
  • Posts: 22
Re: FELP - Foresight Energy
« Reply #1064 on: May 15, 2019, 12:11:57 PM »
the take under scenario sounds compelling but perhaps the cancellation of the dividend has a much more simple reason than a change of shareholder friendliness. On the call More said that excess cash flow will be around 45M and at the midpoint of the guidance they will be again over 4x on the secured leverage. It follows that the excess cash sweep rises again to 75% if their guidance is correct. Of course, there might be some insurance proceeds which could change the picture but without them there would only be around 11M available for distributions. It kind of makes sense that they cancelled it given the situation, take under plans or not.

Actually I think Moore was being a bit too optimistic when he guided $45M excess cash flow. Here is what I got:
    $280 (mid pt ebitda) - $140 (interest) - $78 (mid pt capex) - $34 (longwall finance) = 28M

Without insurance proceed or more volumes from either export or Hillsboro, there is no way for them to do $45M excess cash flow for 2019. 

I remember a year ago, Moore commented on CC that he thought FELP would delever to 2.75X within the next 18 months or so. But here we are, back to 4X at the end of 2019. I guess this commodity business is really tough, even themselves could not have thought that things would have turned bad so quickly.

I just re-read the transcript again and difference might be a working capital release. Here from the Q&A session:
"
Matthew Fields

Hey guys. Just wanted to follow up on that cash flow. So $45 million to $55 million, is this sort of a free cash flow assumption from the current guidance? It sort of implies a completely neutral working capital amount throughout the year. Is that the right way to think about it?

Robert Moore

No. There would be some positive benefit from the working capital release.

Matthew Fields

Can you quantify that for us?

Robert Moore

In terms of just ranges, call it, $15 million to $20 million.
"


heth247

  • Hero Member
  • *****
  • Posts: 559
Re: FELP - Foresight Energy
« Reply #1065 on: May 15, 2019, 12:42:36 PM »
the take under scenario sounds compelling but perhaps the cancellation of the dividend has a much more simple reason than a change of shareholder friendliness. On the call More said that excess cash flow will be around 45M and at the midpoint of the guidance they will be again over 4x on the secured leverage. It follows that the excess cash sweep rises again to 75% if their guidance is correct. Of course, there might be some insurance proceeds which could change the picture but without them there would only be around 11M available for distributions. It kind of makes sense that they cancelled it given the situation, take under plans or not.

Actually I think Moore was being a bit too optimistic when he guided $45M excess cash flow. Here is what I got:
    $280 (mid pt ebitda) - $140 (interest) - $78 (mid pt capex) - $34 (longwall finance) = 28M

Without insurance proceed or more volumes from either export or Hillsboro, there is no way for them to do $45M excess cash flow for 2019. 

I remember a year ago, Moore commented on CC that he thought FELP would delever to 2.75X within the next 18 months or so. But here we are, back to 4X at the end of 2019. I guess this commodity business is really tough, even themselves could not have thought that things would have turned bad so quickly.

I just re-read the transcript again and difference might be a working capital release. Here from the Q&A session:
"
Matthew Fields

Hey guys. Just wanted to follow up on that cash flow. So $45 million to $55 million, is this sort of a free cash flow assumption from the current guidance? It sort of implies a completely neutral working capital amount throughout the year. Is that the right way to think about it?

Robert Moore

No. There would be some positive benefit from the working capital release.

Matthew Fields

Can you quantify that for us?

Robert Moore

In terms of just ranges, call it, $15 million to $20 million.
"

I think you are right.  In 4Q 2018, although they generated huge adjusted ebitda, they did not generate any operation cash flow, because of working capital change. I guess part of that will be reversed this year.

morob

  • Newbie
  • *
  • Posts: 22
Re: FELP - Foresight Energy
« Reply #1066 on: May 15, 2019, 02:23:55 PM »
the take under scenario sounds compelling but perhaps the cancellation of the dividend has a much more simple reason than a change of shareholder friendliness. On the call More said that excess cash flow will be around 45M and at the midpoint of the guidance they will be again over 4x on the secured leverage. It follows that the excess cash sweep rises again to 75% if their guidance is correct. Of course, there might be some insurance proceeds which could change the picture but without them there would only be around 11M available for distributions. It kind of makes sense that they cancelled it given the situation, take under plans or not.

Actually I think Moore was being a bit too optimistic when he guided $45M excess cash flow. Here is what I got:
    $280 (mid pt ebitda) - $140 (interest) - $78 (mid pt capex) - $34 (longwall finance) = 28M

Without insurance proceed or more volumes from either export or Hillsboro, there is no way for them to do $45M excess cash flow for 2019. 

I remember a year ago, Moore commented on CC that he thought FELP would delever to 2.75X within the next 18 months or so. But here we are, back to 4X at the end of 2019. I guess this commodity business is really tough, even themselves could not have thought that things would have turned bad so quickly.

I just re-read the transcript again and difference might be a working capital release. Here from the Q&A session:
"
Matthew Fields

Hey guys. Just wanted to follow up on that cash flow. So $45 million to $55 million, is this sort of a free cash flow assumption from the current guidance? It sort of implies a completely neutral working capital amount throughout the year. Is that the right way to think about it?

Robert Moore

No. There would be some positive benefit from the working capital release.

Matthew Fields

Can you quantify that for us?

Robert Moore

In terms of just ranges, call it, $15 million to $20 million.
"

I think you are right.  In 4Q 2018, although they generated huge adjusted ebitda, they did not generate any operation cash flow, because of working capital change. I guess part of that will be reversed this year.

Purchases of 2L likely coming out of this and potential insurance claims. I suspect if they buy any, it will be in the second half of the year. This is the problem with the stock. There seems to be no positive catalyst for rest of year unless we have a turn in export prices. Q2 will likely be weak due to the river conditions and then you have the uncertainty with API2 pricing in the second half as the remaining 2mm export volume unhedged. I can imagine they will likely wait how this plays out before using some of the flexibility for purchases of 2L notes.


heth247

  • Hero Member
  • *****
  • Posts: 559
Re: FELP - Foresight Energy
« Reply #1067 on: May 15, 2019, 03:56:03 PM »
Purchases of 2L likely coming out of this and potential insurance claims. I suspect if they buy any, it will be in the second half of the year. This is the problem with the stock. There seems to be no positive catalyst for rest of year unless we have a turn in export prices. Q2 will likely be weak due to the river conditions and then you have the uncertainty with API2 pricing in the second half as the remaining 2mm export volume unhedged. I can imagine they will likely wait how this plays out before using some of the flexibility for purchases of 2L notes.

They still have $112M capacity in revolver, I wonder if they can use that to purchase the 2L.  They mentioned that they are limited by the RP basket, but didn't want to disclose exactly how much.