Let me ask a couple more questions.
1. Cline has the cash to come in and settle, but is Murray in any type of similar situation? Could he come in with some type of settlement himself or is too late to raise that amount of cash? I'm not sure about his company and ability to raise cash.
2. I understand you're reasoning on the upside for Cline to settle, but what is the downside? I mean he could presumably just walk and lose his 30%, which is peanuts compared to the cash Murray just paid him. Is it worth the headache to settle? Is there a chance of losing more money if he settles? There is a lot of cash flow here, so the downside seems limited.
I look at the industry and regulations and like BG2008 says, it's a slowly melting ice cube and it would seem FELP is in a good position given it's low cost coal, but are there some political risks here as well? If a Democrat wins the White House, the EPA regulations will likely be continued or accelerated. If it's a Republican, will they try to roll back some of the coal regulations?
I realize this is coin toss, but it does seem like the coin is slightly weighted to settle.
Thanks for the interesting thread! I've learned a ton.
1) I don't think Murray has a lot of options to come in and help refund payment on the $606 million. Murray Energy bonds have collapsed to $10 and it was very difficult to get the bonds to market when they acquired FELP in the first place. That said, Bob Murray is an interesting guy and he might be able to chip in something. Most of this is in Chris Cline's hands because he can fund everything on his own.
2a) On the downside, he loses over $50 million per year in distributions from FELP and SXCP. He also loses a few hundred million on FELP and SXCP. He might only lose $90 million on current market values for FELP and SXCP but I don't think he considers $1 for FELP as the real intrinsic value. Last year FELP generated $136 million of DCF against a current market cap of $142 million. What multiple do you give a coal business that can still turn significant positive cash flow at depression like conditions near the bottom of the cycle? He's going to be giving that up.
2b) If he comes in with a bunch of new equity then I think you can make the argument he has capital at risk again. I think if he came in with second lien 10% debt he would protect himself against a loss in equity value, being fulcrum in the case it enters bankruptcy in the future anyway, and there would still be over $120 million of 2015 DCF against a $142 million market cap.
2c) Just for arguments sake, if he thought all equity was the best couse of action from a downside risk perspective (not sure why), you would end up with around $253 million of DCF on a $748 million market cap. That's a lot of cash generation for Cline but it would bankrupt Murray.
2d) So it seems worth the headache to settle. Unless he doesn't want to be in the coal business anymore. His public comments certainly don't appear that to be the case.
I don't know how to handicap the political risks. I think there's going to be a certain amount of diversification among sources of energy generation for various reasons and coal will be one of them. But that's not why the stock is at $1, although it may be something Cline is considering when investing in the debt/equity at the current stage of the coal cycle.
