Q1 2021 Hallador Energy Co Earnings Call
Good day and welcome to the Halliburton Energy Company first quarter 2021 earnings conference call all participants will be in a listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Becky Palumbo. Please go ahead.
Thank you Betsy.
Yesterday afternoon, and Howard our energy released its first quarter 2021 financial and operating results on form 10-Q, and issued a press release containing and certain financial metrics. Both documents are posted on our website today, we will discuss these results as well as our perspective on market.
Conditions and outlook.
Following our prepared remarks, well open the call up to your questions before.
Before beginning a reminder, that some of our remarks. Today may include forward looking statements that are subject to a variety of risks and uncertainties and assumptions contained in our filings from time to time with SEC.
These forward looking statements are based on information currently available to us if one or more of these risks or uncertainties materialize or and if our underlying assumptions prove incorrect actual results may vary materially from those we projected or expected.
And providing these remarks, we have no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise unless required by law to do so.
And there's one our president and CEO and Larry Martin our CFO on the call with us today and with the required preliminaries out of the way I'll now turn the call over to Larry.
Thank you Becky and good afternoon, everyone.
Before I get started and I'd like to define a couple of definitions for our.
Items that I'm Gonna go over we define free cash flow and net income plus deferred taxes, plus depreciation depletion and amortization.
Changes in fair value of hedges and stock compensation and lack of maintenance capex and the effects of our equity method investments, we define adjusted EBITDA and EBITDA plus stock compensation and changes in fair value of hedges left the effects of our equity method investments.
So for the quarter, we had a net loss of $1 million or three cents a share.
Generated free cash flow of $5 $4 million.
We had adjusted EBITDA of $11 $4 million and we decreased our bank debt by 1.7 million.
Our bank debt at the end of the quarter was $136 $1 million, our net debt at the end of the quarter $132.2 million and our leverage ratio, which is debt to adjusted EBITDA was 2.78 times.
I will now read now I'll turn the call over to Brent builds on our CEO.
Hi, and thank you all for joining.
During the quarter, our operations team performed exceptionally well production costs were significantly lower when compared to prior quarters.
This increase productivity has yet to be turned into cash and shipments were interrupted.
Coldest February and 30 years.
So the cold wet weather has delayed our cash flow it.
It has led to continued improvement and market conditions, which allowed us during the quarter to increase our sales.
Roughly 400000 tons for the year.
Okay.
And Q1 production costs were $28.88, a ton roughly $5 a ton lower than last quarter and significantly lower than Q1, and 2020 costs of 31 67.
Looking just at old town and it calls for $27.21 for Q to Q1, 'twenty, one versus 'twenty $9.92 for Q1, 2020.
Hello, and excellent operating results will be turned into cash soon and as 180000 tonnes of Q1 shipment delays will be delivered and the second and third quarter.
Resolving and roughly 1.8 million of additional EBITDA for those recorders.
Total shipments for the quarter were $1 2 million tons and.
So the cold weather did delay our cash flow and.
And led to multiple solicitations and additional sales.
If market conditions continue to stay at this level or improve.
We anticipate additional sales later this year.
Increased productivity, coupled with shipments delay caused co inventory to rise by $9 $4 million power.
However, this co inventory will be needed to meet increased shipments for the balance of the year.
How old are was able to reduce bank debt by $1 7 million during the quarter and maintained a 27.900 million and liquidity.
Fight the shipment delays.
Our EBITDA ratio rose slightly to $2 seven eight times at the end of the period.
As we have discussed on past calls how old were expected, it's $10 million Paycheck protection program loan to be forgiven by the SBA. This past April eight as recommended by our bank and <unk>.
We're told the SBA is delayed and processing all claim.
So we patiently await their response.
And the SBA forgiven our loan on the required April a day, our liquidity today would be roughly $41 million.
Looking forward energy markets are recovering as evidenced by increasing gas prices.
On the Nymex price competitive and coal average a dollar and 99 and 2020, that's the lowest average and over two decades.
As of yesterday, the Nymex 12 month gas strip was 299 and so the dollar increase.
This is a price where and.
Indiana coal plants, and 77 per cent of our customer base.
Our dispatching in front of gas plants.
Coal export prices are also improving API for which is the Asian market marker.
For Q3, 2021.
Is it $86 a metric ton for 2020, one third quarter, that's up 26% year over year.
We also see the API two marker and Europe.
For the third quarter of 2021 at $74 a metric ton that's up 24 per cent year over year.
As we look at the general economy.
It seems likely it will be good for the foreseeable future.
The Federal Reserve has indicated it plans to continue its policy.
Easy monetary policy meeting it will do everything they will do everything and their power to keep interest rates low.
Much like prior administrations, president by and that Biden has announced his desire to continue providing unprecedented levels of financial stimulus.
Just to provide a little scale as to how big the U S fiscal stimulus is.
And the U F G reports.
The total U S fiscal stimulus announced.
Since COVID-19 crisis accelerated 13 months ago is now in excess of 10 trillion dollars.
Remarkably this translates to just over 45 per cent of U S. G D P.
And over 35 per cent of the 28 trillion of total U S gross debt outstanding.
Though the growth and national that scares me.
Positive sides of this equation as consumers have cash and their bank accounts.
Harvard Economist, Jason firm and estimate that the combination of above trend income and below trend spending has created roughly $1 eight trillion of extra disposable income since the beginning of the pandemic.
So it appears as if theres plenty of money to fuel the economy.
Okay.
Howard marks who I believe is fantastic and Bachelor and writer.
Points out and as latest newsletter and I quote the biggest risks are always the possibility of rising interest rates rates are declining quite slow but steadily for the last 40 years.
This has been a huge tailwind for and investors that's a declining rate environment lowers the demand return on assets.
Lowers the demanded returns on assets, making for higher asset prices.
But the downtrend and rates is over if we can believe the fed's assurance and it won't take nominal rates into negative territory.
Thus, while interest rates can rise from here and implying higher demand and returns on everything and that's lower asset prices. They can't decline. This.
And this creates a negative lee asymmetrical per proposition.
So today's high asset prices may be justified at today's interest rates, but that's clearly a source of vulnerability if rates were to rise.
I would argue the opposite.
Could be true today for fossil fuel energy company.
There's a fossil fuel energy companies already have high higher cost of capital as the market perceives the need for added risk premium.
And the call for carbon free electricity has increased over the last four years politicians may have over promised on the timing of what is practical to deliver.
And as a result.
How old or went from trading at an enterprise value of $7 one times in 2017.
EBITDA from one one times EBITDA.
Trading at roughly half that multiple today.
The question is will the need for a risk premium increase or decrease from current levels over time.
And how old are more likely to return to multiples of seven X.
Were dropped and multiple to ask over the next few years.
And there isn't a bite and says carbon free electricity by 2035 is our goal and that's an admirable.
However, we find the electric grid operators and the utility Ceos are more tempered and their statements.
MISO says 40 per cent and myself the grid operator from the Midwest to.
And with 40% renewables might be possible.
But they neglect to say by when.
During February was extremely cold weather cause several days myself as generation was approaching 60% coal fired power.
So that's roughly 60 days ago. My son is grid was roughly 60% co firepower that figure does not even include other types of fossil fuel plants that were also running.
At that time.
If we look at January and February of 2020 one.
<unk> has averaged <unk> 46 per cent coal and 24 per cent gas generation means.
Meaning 70 per cent of MISO as generation was powered by fossil fuels.
During the January February time period was this was the last reporting period.
I asked the question is it likely that MISO and replace 70% of its 2021 generation and just 14 years.
Duke, Indiana, our Duke energy, Indiana largest co consumer.
As a net zero target of 2050.
It was 29 years from now.
Last month, Indiana Governor signed a bill, enabling the Indiana utility regulatory Commission.
To take into consideration federal phased out requirements I E carbon free electricity by 2035.
If a particular energy resource and adjust depreciation rate.
Of new planned future generation sources resources in a manner that is best interest of the ratepayers.
This bill potentially requires utilities, who desire to build a new gas plant.
To shorten their depreciation schedules from 30 years to something much less.
Yeah.
On April 22nd Nick Akins, Aep's, Chairman and CEO.
So and Indiana, Michigan power and AEP generation generating company.
Have recent agreement to acquire the.
<unk> hundred megawatt Rockport.
Plant unit number two from the current owners when the lease expires at the end of 'twenty two.
This has significant this has the significance.
Of extending the life of a coal unit.
This acquisition will provide a short term capacity brands for customers.
As they transition to more renewable generation and well share that both Rockport units are retired by the end of 2020 eight.
These investments and I'm quoting acres there.
And our generation portfolio and support our goal of making our generation fruitfully cleaner more economical and achieving net zero carbon dioxide emissions by 2050.
And again note the reference to 2050.
Uh huh.
But also of importance here.
Is this is a case and Indiana.
And where coal unit had been announced for closure in 2020 two.
And to be replaced with a new natural gas plant.
But the utility has now decided to extend the life of the coal units and.
And utilize the existing asset to bridge to the greener future.
What might the value of Coca Cola equities do if this trend of using coal to bridge to renewables catches on.
Is this concept priced into the market today.
Yeah.
Cause the future Colby dramatically changed if there is successful penetration of carbon capture and storage technology.
Tax credits for both carbon capture and storage have been increasing.
Today, there are bills and both the house and the sudden they.
And it would further expand the 45 few tax credits both in size and duration.
At least 10 utilities are considering carbon capture projects and co plants.
Here in the U S. Carbon capture was embraced by candidate by as and is expected to be a component.
Our president Biden and compliance plan.
Carbon capture has domestic appeal because it allows the continued use of produce fossil fuels.
It also has enormous international appeal and countries currently depending on depending on coal generation.
I would also add that most fuel energy companies are working on some sort of business pivot.
We see some coal mining companies divesting of steam coal assets and and.
Increasing their metallurgical exposure.
Others are focusing on owning reserves of renewable element.
Others may focus their attention on developing solar projects, while helping their customers transition to greener electron.
Some are just focusing on generating cash for as long as they can.
So there are two questions investors in this space I think my staff.
How long will the transition take.
And which companies have the management teams that will make the transition.
I think it is unlikely that and electric system that took well over 100 years to develop.
Could be replaced and 14.
I also believe our customers' desire to transition with the help of a familiar face and.
And how old was working every day to try to be a partner to be that partner for our customers.
In both cases, a longer transition period, and or a successful pivot of the company.
Risk premiums will fall and valuations will rise.
Time will tell what how old or investors thing.
As most likely to happen.
So with that I will open up to questions from the.
Got it.
Yeah.
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At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Lucas pipes with B Riley Securities. Please go ahead.
Hey, good afternoon, everybody and thank you very much for your very interesting comments just now on.
I first wanted to ask a little bit about the current market environment, you mentioned strengthening prices.
Internationally domestically, but I wonder if you could maybe hone and a little bit on that day.
Illinois Basin, and what Youre seeing there specifically our.
Where would you put pricing.
Our average products today.
And what sort of term business might be available and would appreciate your thoughts on that.
Well.
You know today as far as term does.
Yeah, we've seen.
And if you kind of look back.
Last year energy demand was way down the struggling economy that the COVID-19 pandemic.
But yet most utilities had.
And.
More cobalt and they needed and.
And so everyone's kind of went in and the last winter pretty long and their positions.
October was the demand November and was terrible and December January and we're good at and February was fantastic from a demand perspective, so we've seen coal inventories.
Kind of come back into alignment.
Everyone is starting to look much more comfortable levels.
You know I think that on one hand utilities are.
Uh huh.
Yeah and utilities are looking at.
It's been long and wrong over the last several years and they've taken some heat over that if there are areas.
You know regulatory COVID-19 committees.
And so they've had a desire to stay shorter.
When gas prices pop here and the last month I think.
And that made them I'll say, Oh, you know demand is better than we thought and we need to run out and.
And by some coal.
We're expecting to see that.
Uh huh.
You know as I said, it and the comments that.
If if the market stays as strong or better I expect to see more buying and the back half of the year.
So all of that kind of playing out.
Like we thought.
But as we see big open positions and our customers' portfolio.
Starting next year.
So we really think business for us is better next year than this year.
And we're starting to better the year off and <unk>.
Little better hedge position.
And you know just from talking to customers that they have bigger open positions.
And I think they're also grappling with.
You know.
As the market has.
Consolidated.
And some cases mergers, but in other cases, just suppliers went away.
I think youre going to see a return to utilities.
Tying up for longer periods of time, because they want to make sure that it's one thing to have a plant that's going to run for the next 10 15 years.
They want to make sure they've got a supplier to work with and the next 10 15 years and that list is getting shorter.
So.
For now because we've had such extreme changes and coal inventories and in 2021 from going from.
Very high inventory levels too.
You know February from a demand perspective kind of got things back in line.
Yeah, I think they're trying to make sure that demand recovery has happened.
And.
Yeah, and they'll just keep filling in with spot.
But it does feel like to me and we are seeing conversations that are that are much longer term in nature.
That are being originated by the utilities.
Very very helpful. Thank you for that color and then.
You touched on it a couple of really interesting points and your prepared remarks and <unk>.
And specifically around the <unk>.
Kind of tying a rising interest rate environment too.
Uhm and.
And.
The Oh and and E M P sectors.
And I want to pull on the spreads a little bit and and ask you. If we are and a rising interest rate environment what have you.
Implications for this renewable energy transition.
Directly.
Obviously, it makes capital more expensive, but would appreciate your thoughts on that.
Well I think that.
You know.
It definitely raises the cost of any new construction.
And so the higher capital cost.
All of this new generation is.
Yeah that would be paid for potentially with with rising interest rates.
Certainly the fed is doing everything and its power to keep interest.
At or near zero or very low.
But.
The question becomes is.
You know if we start to see inflation.
Yes.
Or are people kind of buy 10 year treasuries at 1.5% yield if we have 3% inflation.
So can the fed keeps.
Keep interest rates low forever.
I don't know the answer to that.
I think that there's far less risk for that and the coal space. Because if you look at the KOL group that already has high interest rates I mean, you.
And you look at the KOL spaces bonds are trading anywhere from.
7% to 36% depending on who.
Two the group is and.
Yeah to me, especially as we start to see a return to longer term coal supply contracts.
And I think as time goes on and it will become more evident that we're not gonna be carbon free electricity by 2035.
It's going to be something longer like 2050, like all the utilities are signaling alright.
Hum.
And this is to comply if we want green energy part of the time.
And it can be done is 24, seven and the resiliency that we want and when it's cold and Texas and nobody was expecting it.
That's where it becomes really difficult.
So I think that higher interest rates.
And I think it will affect.
Renewables.
Yet to be built.
It will just make their cost profile go up our people still want to pay that for that and it worked right. It's just a matter of cost what will people pay.
So that but but I think that I think the transition and the point of all my comments really were twofold. One is this transition is going to take much longer than people think.
And because of that there's going to come a point and time.
And where this risk premium that people were putting on the coal space.
I think.
Has the potential to alleviate right we traded at seven times, our enterprise value was seven times EBITDA.
Four years ago.
But what's really changed what's changed is.
The perception of risk.
But as you look at our business one thing that is valuable to it as.
Long term contracts right.
So.
As we see it and returned to the long term contracts I think that the risk premium.
Start to alleviate.
So we'll see.
Also think that.
And I know most of the Ceos of all these different companies and they all you know.
And how they're signaling their public call and they're trying to figure out.
Hey, if our customers want to make a change great.
And we've got to figure out how to meet their goals and their needs and.
And you know we have.
Decade, multiple decade long relationships with.
Yeah.
19 different utilities, and industrial customers here and the U S.
So.
I think those people do on the transition.
Everyone has a different timing for that transition, but I think by and large those those.
And those customers are signaling to us they want to do that with a familiar face can we help them.
And.
But that's also part of the reason once those discussions, but we think this transition period is much longer than what the press might have you believe so for both of those two reasons.
When I look at us and them.
Look even on our competitors.
I think the opportunity for all of these energy companies to trade at a higher multiple.
Is greater.
And then it's opportunity than its probability and trading at a lower multiple and the future.
Very helpful and.
Last last one from me.
You mentioned inflation earlier.
Are you seeing inflationary pressures and if so where are some defaults are getting more expensive.
They were tight.
You had some comments from some of your peers. This earnings season that were pretty interesting along those lines would be curious to hear what you're seeing on the ground today.
Thank you.
Yeah.
Well, you know I'd like to <unk>.
Roof bolts.
That's why you know steel prices are our protocols are costing more bits are costing more.
We're able to get our cost down significantly for the quarter.
So kudos to our production team for that.
Labor.
You know I think that.
To date, we've been able to find good people to do the work and retain those people.
Or jobs and typically the highest paying and the counties that we're in.
Uh huh.
Yeah. So so.
And so far so good I'm, not saying that we're not.
Could labour be co op.
And inflationary issue down the road it certainly could.
And we just have it they have and experience that quite yet.
Thank you very much and continued best of luck.
Thank you Lucas.
As a reminder, if you have a question. Please press star then one to be joined and should the queue.
Our next question comes from Rob Lasalle Suites Lake way capital. Please go ahead.
Yeah, Hi, Thanks for taking my call. So you know you guys used to pay a dividend and obviously things changed you took the dividend away.
And when might that be something you would be considering.
Putting back in and obviously that would probably help your stock price as well.
Yes, I think that.
But our company gets under two times debt to EBITDA will consider it.
But prior to that.
And it's unlikely.
Our first.
Goal is to preserve our balance sheet, so that we can make the necessary.
<unk>.
So we see coming down the road and you know that that might mean.
Our investments and slightly different types of assets.
And invested it in the past.
And so we're just really try and keep our balance sheet to where we can be and positioned to take advantage of that I mean, there's the.
And the grid is in a period of transition and I think that's gonna take decades, not a couple of years, but.
But still and when do we think about the grid is it's fairly rapid change right at about 100 years to build its going to take 20 something to that.
<unk>.
And that creates a lot of opportunities for us right.
Our goal is to solve the problems of our customers and the best that we can help them solve their problems and.
So all of that is a really long way of saying.
We probably won't pay a dividend until we're under two times debt to EBITDA.
Okay, No that's fair enough I think.
You know you're not.
That far away from Madison, and generating cash right now so it.
It seems reasonable.
Thank you.
Thank you for your question.
If you have a question. Please press star then one to be joined into the queue.
Yeah.
Okay.
Alright, well that our OIBDA and got something coming in.
And with no. Other questions. This concludes our question and answer session I would like to turn the conference back over.
Her to pretzels and for any closing remarks.
Yeah.
I want to thank everyone for taking the time of day to listen to our call and their continued interest interest and how it or energy. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.