Q1 2020 Earnings Call
Okay to Hallador Energy's first quarter 2020, <unk> earnings conference call. All participants will be I must tell me about.
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I like to turn the conference over to Becky Palumbo director of Investor Relations. Please go ahead.
Thank you give or take care everybody for taking the time to join US today to discuss our first quarter 2020 result.
As a reminder, this event is being webcast life will be able to accept a replay of this call on our website. We filed our first quarter 2020 form 10-Q yesterday afternoon, and it is now posted on their website.
Just opinion on today's call is Brent Bilsland, our president and CEO and Larry Martin our CFO.
Larry will begin today with the financial overview of the quarter, followed by Brent My comments on operations and market perspective.
After they complete their remarks do we will open the lineup for couponing today. Our remarks. All include forward looking statements that are subject to certain risks and uncertainties.
It could cause actual results to differ materially for example, or estimates of mining costs.
Get your 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, a new information future events or otherwise, except as may be required by law.
With that I'll turn the call over to Larry began his quarterly review Larry.
Thank you Becky good afternoon, everyone.
Let's start with our operating results for the quarter.
For the quarter, we had a net loss of three point sevenmillion or 12 cents a share I would like to point out that 3.9 million of our losses were due to fuel hedges and interest rate swaps that are non cash.
Our free cash flow for the quarter was 6.8 million, our adjusted EBITDA 13 point Ninemillion.
Are we decreased by 12.1 million for the quarter and we pay dividends in February of 1.2 million or four cents a share I.
I would like to go over the definitions.
Free cash flow, yes, net income plus deferred income taxes, plus depreciation depletion and creation and our a aro accretion.
Change is that fair value batches in stock comp last maintenance capex and the effects of our equity method investment.
We defined adjusted EBITDA, and EBITDA, plus stock compensation, a aro accretion and our change in fair value Apache has left the effects of our equity method investments in our glass sands.
At 331, 2020, we had $168.1 million a bank debt, our net debt with our or.
Not a cash was 160.1 million.
Our debt to adjusted EBITDA.
Leverage ratio was 2.93 times.
I'll now turn the call over to bring those our CEO for comments on the quarter.
Thank you Larry.
Thermal coal export prices collapsed in the second half 2019.
Pressuring domestic steam coal pricing now.
We did not participate in a thermal export market.
But when competing tons he's going overseas.
Returned to the domestic Steve market to compete against our talent.
Additionally, natural gas prices mark their lowest levels and 21 years during the first quarter of 2020.
Top that all off with most of the United States have developed world close and sheltered in place raised the 10 weeks during part of the first and second quarter.
These challenges we have experienced in the last several months are a historic proportions.
The culmination of these extreme events, let us take proactive steps to increase our financial capabilities. So that we can sure consistency at a time in the world is experiencing great volatility.
In anticipation of shipment delays in potential production interruptions.
However has amended its credit facility to provide 55.4 million and liquidity as of March 31.
Suspended this dividend.
Received the 10 million dollar loan under the Paycheck protection program.
And permanently closed at Carlisle mine.
We took these decisive actions as power demand has experienced a dramatic decline in the first and second quarter.
My so were 78% of our customer solar power.
Is forecasting power demand and their territory to be 10% lower.
For 2020 on an annualized basis, but at times demand, it's been off up to 30%.
This has led to increased inventory levels at both our customers locations and our mind.
That's our revenue has been delayed until our customers can receive shipments.
Accordingly, we have amended our credit facility to allow for higher levels of leverage, allowing us to access our full credit facility.
As part of our credit facility Amendment, we agreed to suspend or dividend until our leverage ratio falls below two times debt to EBITDA.
On April 16 powder received a $10 million alone under the Paycheck protection program.
According to the current guidelines from the S.P.A. and the U.S. Treasury Department.
How old are how's appropriately qualified and receive said thought.
Outdoors utilizing the PPP funds to pay two months of payroll and other covered expenses.
Under the terms of the cares Act the company expects a portion of the loan to be forgiven by maintaining current staffing levels through June thirtyth of 2020.
During the first quarter, we idled and permanently closed the Carlisle mine after experiencing 18 months of negative free cash flow at the mine.
This decision will further reduce our overall cost structure.
Maximize our per ton margins and reduce current and future capex by utilizing 23 million of Carlyle equipment at our Oaktown mine.
As a reduced coal and parts inventories, we will generate significant cash to be utilized for debt reduction.
The idling and closure of the Carlisle mine contributed to our elevated operating cost of $31.67. During the Q1 of 2020, However, oaktown cost for the quarter were 29 92 per tonne inline with our prior guidance.
Shipments for the quarter 1.5.
A million tons or well rounded it was 6.1 million tons annualized.
We have another 5 million tons sold for the balance of the year, which we expect to be weighted towards the second half of the year.
From a market perspective, we are encouraged by forecast showing a reduction in gas supply later this year.
It is estimated at 40% of the 95 Bcf a day of U.S. natural gas production comes from associated gas producing wells targeting oil production.
Which would translate to 38 bcf coming from associated well.
[noise] According to Evercore active frac crews in the U.S., which we think is that helpful proxy for new oil and gas production activity.
Well declined 75% from the first quarter of 2022, the third quarter of 2020.
So 80 cruise dropping to excuse me 315 cruise.
Dropping to 80 cruise.
As it may for Baker Hughes reported that rig counts for drilling in oil oil and gas a decline from 1800 excuse me 1085 rigs at the end of 2018 to 408 rigs today.
62% decline.
What are the same time period gas targets have declined 59% or gas targeted rigs have gone from 198 rigs the 81.
Energy ventures analysis, the stated that it one bcf per day.
Gas supply decline equates to roughly 23 million tons of coal demand.
Well analyst forecasts all agree a decline in associated gas is eminent.
The wide spectrum of an opinion exists regarding the amount of associated gas decline.
The velocity of the decline.
And the duration of the decline.
Forecasts on the magnitude of the decline range from a conservative four Bcf per day.
To a high point of 16 Bcf per day.
JP Morgan Goldman Sachs have both recently forecasts gas production levels will decline.
By four to six Bcf per day.
But what is 16 Bcf is correct.
The coal industry is not capable of bid a bridging such a large reduction and gas supply if the 16 Bcf per day is correct.
During the last quarterly call, we discussed the magnitude of coal mine Idlings enclosures and 2020.
In particular for the Illinois Basin.
Since January of 2019, 15 million tons of coal production has announced that as idled or closed.
80% of which has permanently close.
We estimate another 15 million tons of production has come offline with no public announcement.
In totality, roughly 30% of 2018, Illinois basin production.
It's not currently operate.
And since our last call we.
We have seen numerous additional mines be temporary idle for several weeks at a time due to reduced shipments from lower power demand.
Some of these temporary islands are likely to be extended.
Well difficult to currently project the amount of volume this takes out of the market.
It is significant it shows a definite willingness to adjust production.
The current demand.
So in summary [noise].
We certainly have experienced dramatic markets as of late.
And we are impressed by the speed at which the gas and coal markets appear to be rebalancing.
We believe it how it or has taken the necessary steps to ride out the storm.
It continues to generate positive cash flow for its shareholders.
No small task in these challenging times.
With that.
I'll conclude my prepared remarks, then open up for QNX.
Well now begin my question answer session Talisker question I Press Star then one on your Touchtone phone, if you're you're saying speakerphone. Please pick up your heads up before passing the kids.
To withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble a roster.
Oh first question will come from Lucas pipes, what the Riley. Please.
Please go ahead.
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Hi.
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Thanks.
So to repeat the numbers.
You know we think that.
Natural gas supply has been about 95 Bcf.
Good day.
On an annualized basis, one bcf.
According to EPA is roughly 23 million tons of colder than.
So from a supply side we've seen.
You know different analyst come out and say that somewhere between four and 16 Bcf a day, which is a huge range.
Is how much gas supply will come off.
Majority of which.
He is associated with.
You know associated gas, so somebody targeted an oil well.
And it also produced gases as a byproduct.
When we looked at the analysis again J.P. Morgan Goldman Sachs, certainly others, you know they seem to be the bigger boys seem to be you know.
I would say five and a half bcf seems to be the.
The consistent number that we see.
But to me it's difficult because.
You know the moves in the market or just so extreme right that take.
Oil prices from 60, the negative $37 it.
A barrel yeah that hasn't happened before <unk>.
They have report, saying that we're running out of oil storage space in the U.S.
Oh, Yeah, we've come close to that a handful of times.
But.
And then you know on the gas side and one thing that's changed why we're seeing some more dramatic swings.
Its gas storage has not really increased in size compared.
Gas production, so gas stores now represents a smaller.
Percentage of gas supply.
And then when does when does the market come back from in capital.
Certainly has tightened for you know oil gas and coal.
So.
It's kind of this.
Unique world, where everything's coming to the grinding halt at the end of Q1 beginning of Q2.
And then it feels like.
You know you as cold needs to be running pretty substantially at capacity.
Sometime next year now.
Getting 4.8, a point b is gonna be volatile.
And we sit there and say well, okay. If U.S. coal production is running at 500.
65 million tons of production.
Yeah, we have estimates that are saying we're somewhere between.
Now 100.
And for you know she took the 16 Bcf is 400 million tonnes, a cold a man I thought you know U.S. is not capable of producing that anymore. So.
So from that perspective.
We think it's going to be interesting right and what we're basically saying is we see light at the end of the tunnel, we just don't have a.
A great feel for how quick.
Now you asked about LNG.
You know, there's LNG plants under construction.
Oh, there's LNG, that's that's backing up 90% of LNG roughly is under contract tempur since the spot market.
You know LNG overseas price you know the KJ markers certainly.
Not in the money today.
So how much how much demand has that taking off.
I don't know to certain it I mean, I think it could be up to one bcf.
But.
I don't think it's materially more than that and I think there's plants still under construction.
If there's an infrastructure bill.
Thank you even more plants continue to get to get built.
So it's just an unusual time look system in the markets.
Our.
Really being pushed around it extremes.
I think.
You know the positive that we have going is.
Export came back winter was mild gas prices at 21 year lows.
Most of the World went on locked down for eight to 10 weeks.
And we're still cash flow positive.
Yeah, we still have it pretty strong forward contract position.
And so and we know that.
You know here, we had gas prices the spot price for gas on April 2nd it was $1.55.
And the gas price.
Last night for January future was $3.02.
So we see these you know.
Extreme price disparities in such a short period of time.
But it looks like to US coal is coal is gonna be in the money next year.
So you're going to see gas plant or coal plants.
Dispatching in front of coal plants.
Well, we don't have a strong feeling for is when does the coal bar returned to the market right now they're choking on coal.
Well, we know there's a transition point there where they.
You know look materially short coal.
Oh so that's.
That's what we're trying to be is conservative a possible by you know we didn't give guidance on what we think sales are for next year.
We've put as much liquidity, we've tried to put a lot of liquidity on our balance sheet just to make sure that but we get to that light at the end of the tone, we feel we feel pretty good that.
We get there.
So between.
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How much.
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Well in Indiana, We see you know Duke energy is doing a detriment so they're burning off their inventory.
At a time when.
Gas is dispatching in front of coal that's the that's starting to flip in Indiana with.
We're current gas prices are.
Oh are gonna be here in the next couple of months.
So.
So we feel that you know due to the largest utility in Indiana, we feel like they are doing the correct steps to get their inventories in line, we know of other utilities.
That are also doing.
Decker minutes, So force running plants burning off inventory. So we're hopeful that those actions kind of get us.
Get the utility market back in balance from a coal perspective in Indiana.
Towards the end of this year.
Okay.
With that is that is.
We talked about.
Because markets are moving such extremes, it's hard to get a good grasp on.
You know how much associated gas is coming on.
Off.
You know what what's the amount of decline, what's the velocity of that decline, what's the duration of that decline.
Oh, because those are those are big numbers right.
Yeah, there's all sorts of different analysis out there you know some people are saying well the oil and gas industry has got to shut off.
It's old wells.
The old wells.
Our producing more gas then the new wells and so we've got to use.
You know 3.7.
Mcf per barrel you know so its versus 2.3 for a new well I mean, so it's.
Just really hard for anybody to get just not enough data points to be able to pinpoint.
Well the actual day.
I think we're much better it saying.
It it is heading into right direction.
Now, there's there's uncertainty out there there's just a lot of uncertainty out there and that's why.
You've seen us.
Try to pack on a bunch of liquidity onto our balance sheet just to make sure we write out that storm.
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So we've closed the Carlisle mine.
And we're focused on the Oaktown mine, which is a lower production lower cost profile.
Oh now we've been running that.
Yeah, we've got four units running at Oaktown.
I think it's capable of seven.
And then you know like said we've kept the cost under.
$30 a ton of as I was happy with the numbers we saw in April.
Out of it up so.
So we feel we feel pretty good about that.
Certainly you know think we can do better if we can get volumes up.
Oh.
But.
No. The thing about these markets are everytime markets are high price I think it's gonna last longer than a dozen everything every time markets on low price I think it's going to last longer than it does.
So we're preparing for the worse, but we certainly see.
Yeah.
This does change in gas is very material.
Yeah.
What's going to happen to pricing and we've seen so much coal supply come offline.
Certainly is gonna be a rejigger period, right, where inventories are coming down and people are trying to get mines back online but.
It looks like to me, we're gonna be materially healthier.
From a market perspective.
In 2021.
And we certainly believe that we will make additional sales.
In 2021.
That's helpful.
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The market.
I think that we are prepared to I think we're prepared to run on water contract minimums are.
But we certainly believe we will be making additional sales.
Okay.
And then.
Last question for me.
Yeah.
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That's what the market.
Well we've seen.
Significant companies in the space.
I don't mind for four to six week.
Oh, Yeah, I know one one supplier had.
You know five of their seven mines down for four weeks. They brought one on last week.
The remaining four mines, you know I think there now in week six.
Those mines coming offline.
And when they're bringing them back it looks like to us, they're bringing them back at you know 55% of the original.
Capacity.
Oh, So I think they're doing you know prudent decisions to reap rebalanced market get inventories.
In line.
And that kind of what you know the market Mrs to some degree is that Oh, the mines back online will you haven't it's that back on line with.
You know happens units running.
Oh or Longwalls that are running you know one ship today.
Two days a week.
And Weve you know we've seen this for multiple producers.
And we saw you know just last week, we saw another.
Permanent mine closure announcement from a competitor in the state of Indiana.
Oh, so we when we know there's some private that.
We're on life support there, they're not paying their vendors.
And.
You know.
Quite claiming that they will but eventually the vendor say.
No.
So we do think theres been like I said and and in our prepared remarks, we think 15 million tons.
Has been announced.
About 80% of that as permanent I I'd say, maybe that's a lot was that was our data point for March I'd say, there's been a couple more permanent announcements since then.
I think or some of the bankruptcy proceedings that are going on.
You know, it's they all started out as chapter 11.
Some of them and up in chapter seven and one of the larger ones is currently in bankruptcy.
You know probably comes on them and chapter 11.
But if they come out in chapter seven that you would see material reductions and volumes.
In the market so.
Just such an unusual time, because there's just such extreme.
Market factors at play.
And.
You know most people are.
I think factoring in a conservative reduction than gas.
But I asked the question what happens if it's.
Not a conservative number what happens if it's closer to 10 Bcf.
I mean, when all these mines try to go higher back at the same time.
There's not going to be enough people. So.
So that's the case for.
Dramatically higher prices.
It's just it's just hard it's all going to come down to what velocity. This all happen, but again we.
We're not very good at predicting what day, that's going to happen, but we.
We certainly think the curve is heading in the right direction.
Right.
Right.
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Alright, Thanks Lucas.
Again Tasker question Star another one.
Star then.
[laughter] Star then one ask your question.
Our next question will come.
Douglas Duthie, what do you see capital. Please go ahead.
Good afternoon.
Hi, Douglas.
Good.
Just give me an.
An idea in terms of I guess your cash <unk> forecast for the or not so much maybe on the EBITDA, but just on the amount between interest expense capital expenditures.
Any other major items.
It should be considered.
Well its stated our capex that are in our quarter. We expect spent 20 million on capex for the year.
Okay, how about on the interest expense what do you think that will be for the or just a range.
11 to 12.
In the 12.
So that's down from last year, that's correct.
Yes, I mean, we paid our debt down a little bit and we expect to keep paying our debt throughout the year. So.
I'm not sure if that a whole lot you got it remember our interest rate swap is included in interest expense and Oh.
Oh, yeah, it where it is went negative.
Every quarter last year.
Okay. Okay. Good thank you.
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Yeah go ahead. Please look at that and you got to look at that interest rate swap amount that you know, it's disclose in a footnote and attend the cash flow.
Thank you.
And have you given any guidance.
Cash impact other government program, obviously, you've got the money, but what the net income.
Effect will be.
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I mean based on your expectation there there's still a they're still working on guidance for that it seems like the rules change every day, so we're not putting.
We're not giving any guidance on that for now okay. When it changes we may put out guidance, but for now we're I mean, they're changing the rules everyday on that so.
Okay.
On the changes I've talked about changing with respect to retail establishment. So said it wasn't very well set up for that is there anything specific with regards to your industry that is.
Undergoing change.
Well I think that you know we came out in our original press release and felt that 80%.
Could be.
Given.
It was our initial guidance since that time.
You know we've seen.
Yeah different different guidance supposedly there's more guidance coming yet on the S.P.A. from the S.P.A., So just to be conservative [laughter].
We've we've tried to decline, making estimates as to what that would be I think that was our original analysis. Okay. I don't I don't know that we've seen thing.
Materially changed from their guidance, but that doesn't mean, we won't you know see something at the end of the day today. So that's that certainly understandable and just say the amount that you did receive was how much was it I know.
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10 million.
Okay.
Oh.
Thank you very much I appreciate.
Calling your.
The presentation. Thank you.
Thank you.
I don't ask your question Linda Star then one Star then one ask your question.
Yeah.
At this time I'm showing no more questions. Our question accused so this will conclude the question that your Sasha.
I'd like to turn the conference back over to Brent Bilsland for any closing remarks.
I want to thank everyone for taking the time and joined our call today in a.
We look forward to talking to you next quarter. Thank you.
The conference has now concluded thank you for a chilling today's presentation you may now disconnect.