FELP - Foresight Energy

[RadMan24]

Lowest cost producer, transportation increases costs and limits full capacity of 30 million, steadily declining output, heavy debt load, declining industry, and no positive catalysts regardless of peer bankruptcies.

Is that a fair assessment? Consol Coal currently yields near 30%, but DCF valuation has it at a earnings yield of 15%.

In order for these coal companies to receive higher valuations, coal prices and/volumes have to increase. Does anyone have any idea when that will happen? Any signs that it is or catalysts for it to happen are underway?

I've been warning against coal since 2013 after being burned in 2011. Best thing I've ever did was sell Peabody at $35 (unsplit price) after buying at $60. Adjusting for split terms, $60 translated to when Peabody was $1,100. Yet, Peabody is still "surviving."

[Picasso]

Well the catalyst is a settlement with bondholders and not filing for bankruptcy. 

CNXC is trading at a 20% DCF yield right now, FELP is trading something north of 100% from 2015 figures with half the cost structure and 4x the reserves.  It will take you five years to get your investment back in CNXC from distributions, if 2016 is a trough year.  That kind of a yield once the change of control issues are resolved would put FELP back at some multiple above the current share price.  Whether it's $3 or $5 or whatever depends on how much dilution takes place.

The question is whether you think 2015/2016 is more of a trough or still halfway through a bad cycle.  As long as the debt is manageable I think you should give a full cycle "average" valuation to something like FELP because they'll make it through.  I don't know how you value something like CNXC other than a dividend discount approach declining towards zero because you don't know if there will be any free cash to distribute in five years.

But in the short-term the default issues need to be resolved... we can worry about the cyclical/secular coal stuff once it trades at a price that makes that more relevant to future returns.  Although I'm sure Cline, Murray and the bondholders are thinking about their strategy and the outlook for coal when figuring out a deal.

[randallchsu]

If there is any value in the commons, why wouldn't Cline and Murray called in the units at $1 or however low it might be?

"Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner has the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed."

[Picasso]

Right now Murray's units are not common units and they won't become common units for a while.  Those subordinated units are still "out of the money" by $2 of distributions per unit.  That's why they need to resolve this mess, not dilute too hard, and focus on managing the partnership for DCF. 

The GP can call in the stock once they convert those subordinated shares and own the bulk of the common units.

[RadMan24]

Didn't Murray suggest coal demand in the US will drop to 650 million tons or so? That's a long way to go.

Regardless, what are your views on Felp being a MLP rather than a C corp? In situations like this, do you believe it's a beneficial structure to its long-term health?

[bigbadwolf]

EFFECT filed with SEC - also another 8-K for an extension until 4/5.  Wonder if we are approaching a resolution.

https://www.sec.gov/Archives/edgar/data/1540729/999999999516004059/xslEFFECTX01/primary_doc.xml

[awindenberger]

EFFECT filed with SEC - also another 8-K for an extension until 4/5.  Wonder if we are approaching a resolution.

https://www.sec.gov/Archives/edgar/data/1540729/999999999516004059/xslEFFECTX01/primary_doc.xml

What is a form EFFECT? There's no info in the filing.

[Picasso]

Here are some excerpts from the court filings from last year.  It's both interesting and funny.

4. Murray Energy and Foresight are coal mining companies operating
below ground coal mines concentrated in Illinois, Ohio, and West Virginia. Even
before the acquisition of control of Foresight, Murray Energy was one of the
largest underground coal mining companies in the United States, with Foresight
being possibly the most cost efficient underground coal mining company in the
United States. Combined, the two companies mine approximately 10% of the coal
mined in the United States. Both companies employ “longwall” coal mining
technology, a highly automated method using far fewer miners than traditional
underground mining. The coal industry in general has fallen on hard times, and
Robert Murray, the chief executive officer (“CEO”), owner, and founder of Murray
Energy, has taken advantage of the downturn to go on an acquisition spree,
acquiring other mining companies to increase the market power and operating
efficiencies of Murray Energy. Mr. Murray has publicly announced that he plans
to be the “last man standing” in the coal industry, and has also stated that “coal is
all he knows,” and that he has no plans of retiring.

5. By contrast, Mr. Cline gives every appearance of wishing to move on
from a lifetime in the coal mining business and to enjoy the wealth he has created
while pursuing other interests.

6. In short, while Mr. Murray seeks to increase his investment in coal
and continue his full-time involvement in the coal mining business, Mr. Cline
wishes to reduce both his investment in coal and the amount of time he spends
running the coal company he founded.

7. Given Mr. Murray’s desire to expand his coal business and Mr.
Cline’s desire to reduce his investment in, and commitment to, Foresight, it was a
natural fit for Murray Energy to acquire a controlling interest in Foresight.
Accordingly, on March 13, 2015, Murray Energy and Foresight Reserves
announced that for an aggregate purchase price of $1.395 billion, Murray Energy
would acquire approximately 50% of the FELP equity interests, 77.5% of the
Foresight Incentive Distribution Rights (which, as described below in paragraphs
63-66, provide economic upside and align the interests of the party controlling
Foresight with the interests of FELP’s other equity holders), and an 80% interest in
FEGP (collectively, the “Proposed Transaction”).

.......

10. Recognizing that the Proposed Transaction would therefore obligate
the Issuers to make an Offer to Purchase, and not wishing to be forced to refinance
the Notes if all or a substantial portion of the holders of the Notes accepted the
Offer to Purchase (the total issuance of the Notes is $600 million), the Issuers
commenced a consent solicitation pursuant to which they agreed to pay the
consenting holders of the Notes (the “Noteholders”) a fee of 8 points (8% of the
face amount of the consenting Notes, equaling $48 million) in exchange for an
amendment of the Indenture so as to not trigger the Offer to Purchase, subject to
the closing of the Proposed Transaction (the “Consent Solicitation”).

11. On March 30, 2015, Foresight announced that it had “reached an
agreement with the holder of greater than a majority in aggregate principal amount
of the Notes, pursuant to which such holder has agreed to consent with respect to
all of its Notes.”

12. In spite of receiving this consent, Murray Energy and Foresight
Reserves did not close on the Proposed Transaction, and instead fashioned a new
transaction which gave the appearance, but not the reality, of stopping just short of
a Change of Control.

13. On April 7, 2015, Murray Energy and Foresight Reserves announced
that they had entered into a new agreement, whereby Murray Energy would
acquire, for an aggregate purchase price of $1.37 billion (a reduction of just $25
million from the original proposed purchase price of $1.395 billion),
approximately 50% of the FELP equity interests, 77.5% of the Foresight Incentive
Distribution Rights, a 34% “voting interest” in FEGP, and an option to purchase an
additional 46% of FEGP for only $25 million during a five-year period (the “New
Transaction”).

14. The Issuers thereupon withdrew their Consent Solicitation, and both
Murray Energy and Foresight announced, in a press release dated April 7, 2015,
that “[a]s a result of the new transaction terms, no change of control will result
under . . . the indenture governing FELP’s senior notes . . . which will remain in
place . . . . after the closing”.

15. However, this attempt by Murray Energy and Foresight Reserves to
escape the Issuers’ obligation to make an Offer to Purchase fails.

So they could have simply paid the $48 million (which the bondholders were okay with) and instead they altered the deal a bit (presumably to save that $48 million) and they're now at risk of losing everything. 

And what has to be the most understated comment from the court in November of last year:

28. The consequences that may flow from the Court’s
Memorandum Opinion cannot negate the correctness of the Court’s reasoning and
holding. Furthermore, these consequences were entirely foreseeable, and
ultimately result from Foresight’s inexplicable failure to even try to reach an
accommodation with the Plaintiff prior to the issuance of the Court’s
Memorandum Opinion. Foresight did not attempt to contact the Plaintiff during
the entire course of this litigation, even after the November 17, 2015 argument on
the Motions, which concluded with this Court’s suggestion that:

I’d encourage you-all to talk about this. It seems to me
that this is a situation where, depending on how it plays
out, it could be disruptive to the entity. And so if there
are ways to avoid that type of disruption by working out
some type of consensual resolution, I think it’s probably
a decent idea.

Probably a decent idea indeed.

[Picasso]

Didn't Murray suggest coal demand in the US will drop to 650 million tons or so? That's a long way to go.

Regardless, what are your views on Felp being a MLP rather than a C corp? In situations like this, do you believe it's a beneficial structure to its long-term health?

If they pull through this change of control thing, then there's plenty of return in the LP structure until Murray's shares convert and you start losing to the IDR's.  Being an MLP no longer implies a low cost of capital (well some are still low cost capital sources but they tend not to have leverage or investment grade, giant sponsors) and this is coal related so will it ever trade similar to other "yield co's?"  Will it ever trade at a 8% DCF yield again?  I kind of doubt it.  But it isn't inconceivable that you can pull out multiples of $1 in distributions if they make it through.

[awindenberger]

Didn't Murray suggest coal demand in the US will drop to 650 million tons or so? That's a long way to go.

Regardless, what are your views on Felp being a MLP rather than a C corp? In situations like this, do you believe it's a beneficial structure to its long-term health?

If they pull through this change of control thing, then there's plenty of return in the LP structure until Murray's shares convert and you start losing to the IDR's.  Being an MLP no longer implies a low cost of capital (well some are still low cost capital sources but they tend not to have leverage or investment grade, giant sponsors) and this is coal related so will it ever trade similar to other "yield co's?"  Will it ever trade at a 8% DCF yield again?  I kind of doubt it.  But it isn't inconceivable that you can pull out multiples of $1 in distributions if they make it through.

Given that the annual minimum distribution is $1.35, and there will be three years of subordination, thats an understatement. Still, I think its probably worth waiting to see the settlement before buying in.