Q3 2019 Earnings Call
Good day, and welcome to Hallador Energy third quarter 2019 earnings Conference call.
All participants will be in listen only mode. So do you need assistance. Please signal a conference specialist by pressing the star Keith followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I'd now like turn the conference over to Becky Palumbo, Vice President Corporate Affairs. Please go ahead.
Thank you I leave I think everybody for taking the time to join US today to discuss our third quarter 2019 result.
As a reminder, this event is being webcast live and you will be able to access a replay of this call on our website.
Filed our third quarter Form 10-Q yesterday afternoon, and it has now posted on our website <unk>.
Because they didn't on today's call Brent builds on our president and CEO and Larry Martin Our CFO , Larry will begin with the financial overview of the quarter, followed by Brett with comments on operations.
After they complete their opening remarks, we will open the lineup for kidney.
Today. Our remarks will include forward looking statements that are subject to certain risks and uncertainties that could cause actual results could differ materially for example, our estimate the mining cost future coal sales and regulations relating to the clean Air Act and other environmental initiatives, we do not undertake to update.
Our forward looking statements, whether as a result at new information future events or otherwise, except as may be required by law.
And with that I turn the call every clarity.
Thank you back again, good afternoon, everyone first I would like to explain a couple definitions we define free cash flow as net income plus deferred income taxes.
Depreciation and amortization.
Reclamation accretion stock compensation.
Last maintenance Capex and the effects of our equity method investments, we define adjusted EBITDA as EBITDA plus stock compensation, plus our reclamation accretion left the effects of our equity method investments.
So.
Hallador experienced a net loss of 3.7 million for the quarter at 12 cents a share.
And for year to date, we had a loss of $100000 were basically zero cents a share.
Our free cash flow for the quarter was 1.1 million.
One point Sevenmillion for the year, our adjusted EBITDA was 10.5 million for the quarter 52.1 million year to date.
We paid down our debt 1.1 million for the quarter 16, and a half million for the nine months.
We pay dividends of 1.2 million for the quarter 3.7 million year to date at 12 cents a share for the core or for the year four cents a share for the core.
Our bank debt at 930.
Was 172 million our net debt was 163 point fourmillion at the ended the quarter.
Our debt target for the ended the year is 160 to 165 million.
And our debt to EBITDA coverage ratio is 2.43 times.
I'll now turn the call over to our CEO Brett build one.
Hi, everybody and thank you for joining our call.
I'm pleased that Sunrise had strong shipments during the quarter at 2.1 million tons.
The put hallador on pace to ship 8 million tons in 29 team, which is a record for our company.
Unfortunately, our strong shipments were overshadowed by three temporary event that let our cost increased by $3, an 86 cents cents for the quarter.
First our Oaktown two mine experienced challenging mining conditions during the quarter.
But was able to return to what I would describe as good production by early October .
Second Carlyle has been working hard to reduce its cost structure since reopening in late 2018.
During the quarter units were relocated.
And in October .
Oh production recovery improve dramatically so much the carlyle experienced record production up 40%.
During the month of October .
Lastly, our eighth in the whole mine had planned a new box cut development in a new mining area and that led to a low production during the quarter.
We believe these events to be isolated to the third quarter as we experienced record companywide production during the month of October .
That's we anticipate our cost structure, returning to our historical sub $30 a ton cost structure.
Looking at 2020, it appears to be a unique year.
The coal export market is currently being pressured by a confluence of cheap liquefied natural gas.
And low price coal coming from Russia.
Now the seaborne market has been growing each year, the pace of about 36 million metric tons.
That's a long term the world need, Illinois basin coal to go to the export market.
So I believe the current market conditions or the equivalent of a lightning strike at your kids soccer match.
Everyone has to return to their cars wait a little while.
Well, the Illinois basin domestic market is experiencing return several times that were export in previous years.
These times are returning and pressuring high cost producers.
In 2018, Illinois Basin produced 106 million tons roughly.
In 2019, we've seen 10 million tons of Delaware Basin production.
Either closed or has announced the be close.
We anticipate that was the sales season wraps up this month, there will be further relocation of contracts moving from high cost producers to low cost producers.
And followed by further mine closures now with a lightning strike occurs loosened time of the game goes on.
Seaborne market for coal is still growing in Illinois basin will soon be needed to return to the export market.
A couple of players who have gone home.
How does in good position to profit from the current market we have.
7 million tons sold for 2020. This represents 88% of our projected 8 million tons for 2020.
Longer term, we are 75% sold grew 2022.
Additionally, wonder baking partner is reviewed our solid sales position it could clearly see our future cash flows.
They agreed to extend our credit facility to September 2023.
And reduced our interest rate by 50 basis point.
That's hallador has improved its low cost capital structure, a time when other than industry him.
Well, we have access to capital and exorbitant prices.
With that.
I'm going to open the call up to question.
We will now begin the question and answer session to ask a question. You May proceed Star then one on your Touchtone phone.
If you were using a speakerphone please pick up your handset before pressing the keys.
Draw. Your question. Please press Star then too.
Our first question comes from Lucas pipes with B. Riley FBR.
Hey, guys. Thanks for taking my questions. This is Dan day on for Lucas I'm, just a quick question I'm one of your peers. That's already reported has talked about consolidation in the industry, where do you guys think hallador fits in the M&A talks there. There are currently ongoing and just maybe any thoughts on the Murray.
Bankruptcy, and how that affects the markets and I'll be as well thanks.
Hi, so two questions or where do we fit in the consolidation that real estate market.
I think that.
We agree that the Illinois basin will continue to consolidate.
We we kind of see.
2020, as a year, where the market yeah market demand is pressured so supply.
We'll get.
Corrected.
And.
Yeah.
2021, or perhaps even late 2020.
We think it's likely that the market re expanse and you know we see export markets continue to grow.
And we see you know gas prices continue to rise we think both the export market in both.
That's all gas prices, if kind of recently been a unsustainable levels. So.
We kind of see this constriction.
Well I think comes out of that is some of the higher costs producers.
Well not be able to place enough time.
Yeah that was forced to make decisions and some of those decisions. We think we'll be well sell their contracts to lower cost producers.
In closing high cost reduction I think that.
What we're going to see we happen to be a really good spot.
There were 88% sold for next year.
We're currently in the middle sale cycle, we've got the down to.
I was six different utilities.
We're waiting to hear where we stacked up in that group.
Or what and how much business were awarded.
And you know and I'd say.
They'll continue to be sales throughout the year I think we've seen other producers also say that yeah. They think the export market gets stronger in the back half 2020, we tend to agree with that.
Because we think that's the long term trend that we're gonna see more and more Illinois basin coal worthy export market, which perhaps might make our market a little more volatile.
And if so the second part of your question was what happened.
With the Murray bankruptcy.
[laughter].
I think that.
You know that there's a lot of issues going on there it's going to be a complex long drawn out. Thanks.
But but I.
I think we'll let them speak for themselves as far as how that's going to play out.
Great. Thanks, Thanks for taking that so you mentioned you see export prices rising towards the back half of next year, what like what do you think the most important catalyst start to get that price higher is it just lower I'll be production as higher cost Springs, just take offline is it yeah, maybe less robust.
<unk>, Russia, the LNG prices, what what kind of a it needs to happen there or what do you see is like that the top catalyst for a higher too.
Oh, the top catalyst I think would be a rise in LNG gas prices.
Right now I think we're seeing prices is unsustainable.
Yeah. That's always a question do you know how long.
How long will it take forward to come back and that's why I thought was such an analogy about you know.
Sitting at my Kids Soccer games, and a lightning strike you know you go back to your cars. They sit there and you know you're going to go back out you know you're going to play.
Just don't know is that going to be an hour or is that could be a half hours that gonna be three hours, but it to me the export market is very much.
That same way I mean, it it's got your time to the strong as time. This week, we know that the overall trend is.
Coal plants are being built around the world and those.
It was plant continue to need cold the feed them.
And the Illinois basin has proven to be low cost that quarter of that thermal market con. So.
We continue we don't think anything changed about that trend it just happens to be.
A period, where you know we got hit with low price LNG, because we had all these new facilities coming online at all the same time.
It's the same <unk> you know what caused Russia. The suddenly say, we want to export a lot of tons cheaply I'm quite sure I know the answer to that.
But we don't think either are sustainable because they aren't sustainable we know that we have to return back to long term trend. The question is just how fast is that happened just from market data at different points that we see it appears to us that the export market kind of falls into the second half of 2020 at this point in time.
It's certain that certainly can change, but that's what the tea leaves look like today.
Great I appreciate your color I'll, just get a one more in <unk> would it be possible or something that you guys might peak might consider given current market conditions to maybe look at your contract book, maybe just settle some contracts financially and then take off higher cost production a is that something you might.
Consider.
I'm not sure I understand your question. So just just so I don't like say look at your contracts, maybe settle up some of them financially sort of just accelerate the supply cuts that need to happen and then.
I moved forward with with lower supply from there.
So I think you're asking or would we.
Deferred tons with customers is that what you're asking.
No just just literally like settlement the contract financially like and then.
Rather inside the tons like settle up financially to accelerate the supply response.
Yeah, all of our can contract your mind specific and none of them have any settlement clauses gotcha. We're not okay. I mean, we're not selling number two yellow course, Alan <unk> Oaktown core Carlyle coal when it's it's not like you can buy them out war substitute Dodger well.
More importantly, as is our customers haven't asked as the deferred anything they are our customers still want the times that they've committed to taking.
And our customers. We believe one additional can be purchased from us. So we think there's some other players out there that abandoned the export market in the big way.
On shorter term contracts those contracts have expired and now they're looking for where do they place those where do they place those times and.
You know that there's not there's not going to be a seat for everybody a low cost producers.
Had a challenging time, but eventually they'll figure out ways to get those contracts out of the high cost producers it into their book.
That's the consolidation I think other people are talking about it at the lower cost producer biopic contract of a higher cost producer get him to shut a ton it.
We think we may see some of that.
Time will tell we may participate in some of that.
Oh, well, that's all I had I really appreciate your color and best of luck.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Easton Park with extra capital.
Hey, Larry hate Brent.
<unk>.
So weve seen a lot of companies in the thermal market, both in public and private companies and they filed bankruptcy. We've seen forbearance agreement that we've also sand producers that are cutting production at various basins, including at the Illinois Basin and I know that southwest mentioned in your interim marks end up previous questions as well.
But we just want to be clear do you have any plans to cut production below 8 million tons right now.
We currently have no plans to do that now we'll have to get through their sales cycle and see where we end up contract position and we will adjust our production to whatever our our sales are well.
More or less than eight 8 million tonne.
And we could easily see a scenario, where lets say, we sell seven and a half.
You know here at the end of the year, we get further into the year and sell spot tons in the summer and fall month, but it seems to be a trend that happened to.
Well the last two years.
We continue to sell because as the year went on a in fact, we just sold sometimes.
Two weeks ago so.
So that's probably what we're going to look like will probably come out with sales a little less than 8 million ton.
And then as the year goes on I think we anticipate making spot sales all that you know it's dependent on one of the export market do what it.
What do gas prices do we've seen a nice bump here in gas prices last week, we are too.
And.
You know like I said, we were strong were strong believers that there's a lot of Illinois basin coal with export and it will lead to return. There. The question is just how quickly or the market is going to come back into balance.
[noise].
Okay. Thanks.
Thank you.
Our next question comes from Scott Caulfield what specific.
Hey, guys I was hoping you could talk a little bit about capital allocation lunch or no kind of debt pay downs and then a focus in the past kind of hourglass sounds good.
Given how depressed the share price is you know what you look at doing buybacks here.
Yeah. Thanks.
I think that.
Our our primary goal is to pay down debt a once we get under two times debt to EBITDA. You know I think then we will give a stronger consideration to share buybacks.
We certainly feel.
That are that are should stock is a value at this price points about me just looked at the free cash flow.
But.
And yeah, we have.
Good sales position that we have great contract, we have great castle visibility in future years, and that's that was part of the reason we went to market to refinance our credit facility.
Yeah, we had such a strong position, where we show to do the banks. They just felt very comfortable.
Two.
Extend our facility it not only that lowered the rate I mean, I think your see higher rates to other producers out there into that space and yet we were able to lower rates and I think that speaks to how comfortable are our syndicate of 10 banks was when they could you know really calculate out.
What our debt pay down of future cash flows look like so.
Part of how we allocate capital right now you primary step number one is continue to pay down debt, we know that as we de lever our balance sheet is gonna be opportunities arise in the market and we Wanna get ourselves in position, where we can take take advantage of that.
As a follow up though it would there be a price at which you would buy back I mean.
If it's your you know 90 million or so market caps. The they talk about maybe John I'd call. It 20 to 40 million free cash next couple of years.
Well, that's already a pretty attractive multiple <unk>, how far would the price has to fall before John what's that.
Well, that's I don't think we have a specific number on it today. It is something that we do look out in our board looks that we've had those discussions.
We feel that.
No the.
We will continue to make Jaslow, we will continue to pay down debt it either our stock rates will rise or we will buy the stock in when the time is appropriate take or initial concern is we want to be under two times debt to EBITDA before we would take that action now obviously you know.
If the stock price continues to fall.
Decisions can change and that is something that we continue to look out on a quarterly basis.
Okay I just kinda last question is there anything you guys still move as far the that's going to our glass sounds thing up on Colorado or is that kind of on hold right now.
So we have a team out there that continues to work on that.
You know we have to wait for the market to be in the right position for us to allocate capital return that makes sense for us. So we continue to work on that.
And we continue to wait for the market to get in position to where it makes sense for us to make make an investment.
Right now, we're not spending a lot of capital on it or it is something that we've learned a lot about we have relationships to that and that field.
And where you know we're looking at more than one deal in that space, but.
Thus far we've not pulled the trigger on any allocating any capital when we do we will make it an out if we do.
When we do we will make an announcement.
Okay. Thanks for taking my question.
All right. Thank you.
Our next question comes from ours, calibrate chinos with AMC capital.
Yes, thank you very much.
Just trying to get your perspective on the Nat gas and the deal and she I've been on the cost everyone. You know the LNG sort everybody like and it's not economic LNG going and was it a result, I mean, I know a lot of stuff came online abroad to ship it but was it accelerated do you think because if you look into Q2 and it hasn't been as an.
I do and and the Q1 and.
Oh I'm, sorry can you into Q2, Q sweetness that gas pricing were to maybe to 24 for a lower something and that that really the buyers really like accelerate their purchases to stock up when they saw that because I'm just trying to think this thing is not sustainable when we look at Nat gas and you're right. We've had a bump up and have seen and just as a follow up to data.
Not a big companies announced yesterday today large capex cuts and it budgets like you know 50% in some cases in large dollar. So just those two points. Thank you.
Well I think our our general viewpoint on gas is you know if you look at.
You asked gas production, you've got 45% of U.S. gas production coming from the Marcellus Utica in the Haynesville.
And the data we look at shows that those guys have drilled.
You know that they're kinda tier one and.
One of the called Super Super Prime in tier one properties the best acreage.
It's about 20% of their acreage and their drilling that pretty aggressive way right now it looks like the as depending on the basin two to three years and that kind of worked through those best acreage position now.
That doesn't mean, they will find some more reserves because I know they will but.
It still looks like to US is there's there's pretty good tremendous.
Pretty good upward pressure on their cost curve.
In the next in the next couple of years. So we.
We don't think that the price of natural gas when it gets down into the two twentys is sustainable.
That the industry in general has been borrowing money and and drilling on borrowed money and that capital source dried up in 2019, and so now you're seeing that the companies have.
To drill within their free cash flow.
And as you said I mean that that's a significantly smaller number so less we know this then that's a the shale gas play has pretty steep decline curves.
And so if we see capex budget cut in half, we know that drilling falls you know proportionately.
So we should see a back off of natural gas prices will we see that and that's kind of what we're talking about it is.
Dynamic of the Illinois basin is that towards the front half of 2020.
Seems to be the constriction point of the market right. We've got export tons coming home looking for a home we're going to push out high cost Todd we know that.
No cost producers are going to buy the contracts of high cost producers that some of those high cost times, they're going to come offline.
And then at some point in time, we know where we believe that the export market comes back maybe in the back half the 2020.
And we see gas prices start to rise it all the sudden now the Illinois basin.
Which was 106 million tons, an 18, we've had 10 million tons of supply announced the come offline, we're probably going to see another.
567 million tons come offline.
And then six eight months from now we think that all the sudden the market starts to go the other way and we need more tons that come out in the basin.
But they'll be less mines and less producers capable of doing that so.
Very easy for everyone to get very focused on the next six month, but if you look out longer term.
Yeah, we're going to see consolidation in the industry, we're going to see high cost on finally come off the market.
Yeah, I think it could be a really interesting to see what happens to the space.
You look out to 2021 in the meantime.
I mean look at space, there's there's some high quality names, including ourselves that have great free cash flow the balance sheets are in healthy positions. Some people have better contract positions. Another that's where we think were very strong.
But you know even some of the low cost producer as well, but we'll find a way through so.
You know to me I think the space looks like a tremendous value, especially when compared against the balance of the stock market you've got the coldest you're trading at three and a half times EBITDA, you've got the rest of the stock market trading at 12.
Oh, no I guess, just yet [laughter], it's been painful, but you have not just Nat gas thing that we just sold and everybody back.
And then.
And on the first part right when I look at Nat gas and the only sheets are loving I mean did did a lot Nat gas just get shipped out via LNG mechanism just because it was so cheap and about the buyers really knew it or is it just like.
It was just a perfect storm use the term lightning strike earlier, but just you had all these LNG facilities getting built and guess what like where two twentyish you know for Nat gas and it was a perfect time.
Even for people to accelerate purchases I, just if you could see those speak a little bit to that so that part.
Well I think you're going to build an LNG export facility, you're talking about you know 5 billion dollar investment.
Most people don't do that I would argue nobody does that without some sort of off take agreements in place.
And so those tons are going to just get shipped regardless of price they're committed to ship right.
Yes, so it's the it's the remaining say, 20% that maybe someone speculated on that price.
That's the that those are the those are the.
Those are the times that are really.
You know pushing the market one way or the other and so.
You know people made commitments and speculated on all right well agreed to take the gas and now you know there kind of stuck in their position they got to play it they've got a they're going to place it.
Regardless of what price and that's kind of puts the market down into this what we would call an unsustainable level.
So that happened in the export market well suddenly all suddenly see Europe in other places flooded with L. cheap LNG.
And that's displays the cool so now the cold kind of coming back to the domestic market.
To kind of wait for this LNG market to to recover we know that it has to recover because it's these are unsustainable pricing.
As far as the domestic gas production the thing that has fundamentally changed in 2019.
Good.
Companies are no longer allowed to borrow are no longer able to borrow capital to drill.
They have to do so on free cash flow they can no longer issue equity.
Because the stock prices have been so beat up.
To raise capital to drill so they have to do it on free cash flow and it's hard to have much free cash flow.
At current gas prices so.
That market will come back into balance it just takes a little time <unk> <unk> and Unfortunately don't think anybody has the crystal ball, what [laughter], what exactly that timing is to us it looks like late 20 Twond.
Yeah, Yeah, no you're absolutely right and again. These capex is capex cuts that were down by three companies I know that large.
What we're like enormous and then one other thing you had a competitor or another coal company I should say the powder River basin and just last question again. Thank you for this.
And they said something like for every 20 cents move in Nat gas the tons and again. This is part of reversed that move our like enormous. So we've had basically two of those 20 sent moves stay reported earnings.
I think just help me out as they think about Nat gas moving up in terms of Oh, either display spent more car more coal are starting to flow through.
That's it thank you.
Oh, I don't I don't.
I don't really have a metric to to support their claim is to 20 set move what that equals two and PRB tenda, it's coming on coming off I think the market is far more dynamic than that.
Mhm, because you know people have a tendency to look at the Henry hub price.
And say well that's the price I guess.
And then other people will say well, okay I looked at the you know Chicago City Gate price, Yes, and say well that's the price of gas in my reason and what really matters is.
As what does the price of gas at the competing gas plant to the competing coal plant by the time that gets delivered what what price pointed that out and that there's a lot of transportation by the time to get to that point. So that's why it becomes.
Infinitely more difficult.
[noise] to say exactly what that price point is you know we've got.
But we know in general how we can hit certain price boys and we've seen roughly what the Illinois basin demand has been.
Well, we've got a factory with the export market has been what I'm, saying is I think the thing I.
I think.
The only basin gets constricted to its tied his point in the first quarter of 2020.
And then beyond that it starts to reignite.
Does it does that take two quarters, where do we expanded that take four quarters rigs ban not quite sure.
We just see a lot of production coming off line and we don't see.
Corresponding power plant closure in our backyard.
So we know that.
Gas prices move really quickly gas prices will.
You know move up or down really quickly, but as they move up because again, we think drilling is showing because the capital expenditure is going to slow.
That gas prices have to rising gas prices have to rise suddenly we have to burn more coal to meet the power demand to be to whether to then.
And.
We think we think we're set up and really good position to take advantage of that.
Very good okay. Thank you for your remarks, Thank you hi, Thank you.
Again, if you would like to ask a question. Please press star.
At this time, we're showing no further questions and our Q.
I will conclude the question and answer session I would like to turn the conference back over to Brent Bilsland for any closing remarks.
Well I, thank everyone for joining the call and are you know I look forward to speaking to you next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.