Q2 2021 Hallador Energy Co Earnings Call

Good day and welcome to the Halliburton Energy company second quarter 2021 earnings call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.

And now I'd like to turn the conference over to Becky Palumbo of Investor Relations. Please go ahead.

Thank you Jason and thank you everyone for taking the time to join us today.

Yesterday afternoon, we filed our second quarter form 10-Q, and issued a press release containing certain financial metrics. Both documents are posted on our website.

Today, we will discuss financial results and our perspective on market conditions on outlet for.

Following the prepared remarks, we will open up the call for your question on.

As a reminder, on my remarks today may include forward looking statements that are subject to a variety of COVID-19 uncertainty on it.

Assumptions contained in our filings from time to time with the SEC.

While these forward looking statements are based on information currently available to us.

1 or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect actual results may vary materially from those we projected or expected.

In 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 required by law to do so with US today are Brent Beltline, our president and CEO and Larry Martin, our CFO and with the required preliminaries out.

The way that we can begin the financial overview.

Larry Thank you Becky and good afternoon, everyone.

I'm going to go over the review of our operating results and before I do I want to get a couple of definitions out of the way we define free cash flow as net income plus deferred income taxes, depreciation depletion and amortization accretion on our reclamation obligation changes in fair.

Value of hedges and stock compensation less maintenance capex and the effects on our equity method investments, we define adjusted EBITDA as earnings before income taxes, depreciation amortization and interest.

Plus stock compensation, our accretion on reclamation obligations and change in fair value of hedges less the effects of our equity method investments in hourglass sands.

Our net loss for the quarter was $3 million or 10 cents a share and net loss for the year to date is $4 million or 13 cents a share we had free cash flow of $6.4 million for the quarter and 11.8 million year to date all.

Our adjusted EBITDA was $11.3 million for the second quarter $22.7 million for the 6 months ended.

We decreased our bank debt by $5.9 million for the quarter and by $7.6 million for the year.

Our bank debt at June 30th was $130.1 million, our net debt was $127.5 million.

Our debt to EBITDA leverage ratio was 2.76 times.

I will now turn the call over to Brent builds 1 to talk about our operating results and the rest of the year.

Thank you.

2021 will be known as 1 of the most dramatic turnarounds for co markets in decades.

During the first quarter cold weather broad power demand, but also weather related shipment delays.

Shipment delays experienced in the first quarter continued for several weeks into the second quarter to.

To the point, we slowed our co production due to elevated inventories at the mines.

Throughout the quarter shipments improved in both our inventory levels as well as our customers inventory levels decline.

In July we saw pricing significantly improve and we were able to sell an additional 500000 tons during the quarter.

We are currently entering a period of time, where if you can produce it you can sell it.

We are working diligently to increase production to our maximum output.

But tight labor markets may delay the velocity at which we increase production.

During Q2 shipments improved to a $5.6 million ton annualized pace.

From a $4.7 million annualized pace in the first quarter.

We expect shipments in the last half of 2021 to run in excess of 7 million tonnes annualized pace.

Thus, we expect to ship a million more tons in the last half of 'twenty 'twenty 1.

Versus the first half representing a 40% increase in shipments.

Co inventory was reduced by $1.7 million during the quarter as a result of this slowed production.

And increased shipments.

Flow production did elevate Q2's production costs of 32.20 per ton.

$1.26 per ton increase over the second quarter of 2020.

Okay on costs were up only slightly at $27.85 for Q2.

'twenty 1 versus 'twenty 768 for Q2 of 2020.

Hum as Larry said, we generated $9.9 million of operating cash flow and pay down our bank debt.

By $5.9 million.

Increased shipments and an expected drawdown on our inventory later this year will generate strong cash flow, which we will use to continue to reduce our debt load.

During the quarter, how old ore was able to reduce bank debt.

[laughter], but $5.9 million in Edmond maintain 26, and a half million in liquidity.

Our leverage RISO ratio decreased gosh darn decreased slightly to 2.76 times at the end of the period.

On July 23rd we received a notification from our lender.

On the SBA approved our P. P. P for loan forgiveness application for the entire P. P P loan balance of $10 million.

Together with interest accrued there on.

The forgiveness for the P. P. P loans will be recognized during the company's third fiscal quarter ending September 30th.

As a reduction in liabilities and an increase in net income.

Looking at the markets gas prices have dramatically increased.

We talked previously that.

Gas as a competitor for coal and in 'twenty 'twenty averaged $1.99 the lowest average number 2 decades.

As of April 27th.

We saw net gas prices average $3.01.

As of August we've seen them improve even further to $3.70.

We witnessed the same increases in price in the export market.

As of April 27th API for the Asian marker for the.

Third quarter of 2021.

It was at $86 a ton by August 2nd the balance of the year shipments had improved to $130 per metric ton.

Same for the API 2 marker April 27th.

Third quarter was $74 per metric ton.

By August 2nd balance of the year shipments had improved $130 a ton.

As we mentioned the significant improvement in markets allowed us to add 500000 contracted tons through our position during the quarter and we expect to add tons later in the year for 'twenty 'twenty, 2 and beyond at significantly better pricing.

The who's your transaction on June 1st we announced we joined with Who's your energy.

Rural Electric cooperative to develop under Oh, excuse me up to 1000 megawatts of renewable power.

The new generation will be located near the Meramec coal generation station Sullivan, Indiana.

Which hoosier energy expects to retire in may of 'twenty 3.

The plan calls for Hoosier excuse me for Howard or to develop approximately 200 megawatts of energy from solar and battery.

George through power purchase agreements with Hoosier in.

In 2025, how old are will seek other customers to develop the remaining 800 megawatts of generation capacity at Mir them.

In future years.

We are excited by the opportunity of this platform.

As it provides.

Our customers and ourselves the opportunity to transition to renewable power.

For Howard where to make investments in the renewable space for decades to come.

In the short run there will be little financial activity from this platform until the Miram cogeneration station retires, which is not expected until 2023.

And a warmer on the Meramec for connection is capable of supporting.

For a $1 billion of solar investment.

And we estimate an additional $2 billion a battery investment.

How old are plans to act as the developer of such projects.

And bring in equity sponsors do project financing project as they move forward.

At our last quarterly call. We spent some time discussing how trading multiples of co producers.

Had declined from an enterprise value of $7.1 times EBITDA in 2017.

Roughly half of that multiple today.

In large part because of investor angst over the trend towards the greening of the electric grid.

And although we continue to believe this transition will take much longer than the 14 years politicians are targeting.

We are thrilled to now have a renewable energy platform in which to invest our free cash flow for decades to come.

Overtime, how old was earnings will come from greater sources, as the grid and our customers transition.

Today, how old are trades on an EV enterprise value of less than 4 times EBITDA.

ESG related companies trade at enterprise values of over 50 times EBITDA.

So we see great potential and the value add for the shareholders of how it or energy.

The investments of our renewable platform take root over the coming years.

With that I'll open up the call for questions.

Yeah.

Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble on roster.

Yeah.

Okay.

Yeah.

Our first question comes from Ross Burger from turnaround capital. Please go ahead.

Yeah, Hi, I was wondering if you could discuss what your anticipated incremental EBITDA margins would be on the additional tons, you're planning to sell on the second half.

Because I can see you know your margins have declined because you're producing less in this quarter versus the last quarter.

You know obviously the market's disappointed in the earnings the stock down I guess, 13% today. So maybe you could give some assurances as to what the future looks like with EBITDA margins.

So with the production will need to to deliver the $3.5 million tons in the second half our margin should return to the 10 to $12 range that way that we're used to getting what our sales are 6 million plus.

For auction.

Okay. Thank you yeah, I think for us.

Third quarter should be.

Excellent for US right, we're seeing.

You know shipments.

In excess of a 7 million ton annualized pace.

That's doing multiple things were running our production wide open as fast as we can hire people.

So more tons means our cost per ton drops.

So widened margins widened out in that regard.

I think the market is read a lot of headlines about you know wall Street journal on the other saying that pricing is up.

What everyone has to remember is you know pricing really didnt move up til.

We thought we probably saw the most dramatic price improvement.

In July which is the third quarter and on second quarter you.

We saw very slow shipments.

Really in the first half of the second quarter.

Which is why we kind of talk about this as just a such a dramatic.

Improvement.

That we've seen.

So as shipping has improved.

And inventory has come down.

We're seeing we're seeing shipments pick up dramatically.

Pulling our inventory down.

And we really you know kind of winning our first quarter of the year.

Had increased inventory levels, which we were happy with we expected price improvement and more sales in the back half of the year they've been much more much stronger.

Then when he was as expected as of late so if you look at it from a second quarter only perspective.

You know we are.

Shipping slow shipments on legacy contracts slowing production because inventory levels got pretty high and so as we saw those inventory levels come down on shipments improve we start we began ramping production back up.

And now you know pedal to the metal if you can produce it you can sell it.

And so you know that's causing an increase in pricing.

And you know some of that will be picked up on the back half of the year. Some of that will be picked up on all of next year.

Yes.

Can you give us an idea of the.

The price increases you're talking about per ton because I guess, you know is it above $40 debt, you're historically selling out over the past few quarters.

Yeah.

Yeah, So we've seen about 40% price appreciation for March.

So something in the low thirties in March to something in the in the mid Forty's.

For next year.

And it may be higher it's really things are moving so quickly right now and things are so tight it's really hard to get a gauge.

For how much price hasn't prove it may have improved more.

We're still trying to.

To figure that out with customers because again, it's just 1 of these periods of time, where.

You know I've been doing this for 17 years of this is probably the third time this has happened.

And we've just seen.

You know almost a hockey stick approach to pricing we saw export pricing.

Good early in the year and continues to get stronger.

But the domestic market really hadn't.

Reacted to that I would say until you know materially in July.

So this is a relatively new occurrence.

Recent occurrence I should say.

And you know I think it's something that.

The market now is coming back to the coal industry and we've read some headlines about coal plant retirements, but no one's really paid attention to is how many how much production retirement theres been.

And so now as the market comes and tries to lean on coal.

Is leaning on an industry that that's you know much smaller than it was before.

So.

You know if we look at Indiana alone, we think 15 million tons of production that was here a year.

A year ago.

There is no longer here now.

And so.

You know that's that's.

Great from a yeah.

Less supply higher prices, we're trying to get a handle on where and how high and how fast this market.

Is going to rise and.

You know I think everybody is trying to do the same thing.

Realize these large price increases that we're talking about R 22, and be on because you know we hedge most of our content.

All of our tons, except for a few hundred thousand tons more.

Before we came into there.

Their top market in June and July.

For 'twenty, but you still get the benefit from from the additional.

On that you're selling right you should be able to make them. You know you make money at $40, if that's where you're hedged at.

These additional incremental tons that you're selling these are these unhedged or hedge tons.

I think what we're saying is is that.

For 2020.1.

We're pretty much sold out at this point.

And pricing is going to be you.

You know pretty much on that.

$39 range is what we're gonna average, we think that 'twenty 2 'twenty 'twenty 2.

We will see.

You know that average price moving move up into the forties.

For all times.

Closer to what the market is what it is what you're saying if the margins in the mid forties. This 40% price depreciation that you're talking about in the markets is something that you'll be able to achieve in 2022.

No what we're saying is.

You know, we've got 5 million tons sold for next year.

We're trying to figure out are we going to produce 6 and a half or are we on a produced 7 million tons in 2022, that's going to be dependent upon labor the market.

Can support that demand. So our pricing is already set on 5 million times, we're trying to figure out what the pricing is on the remaining million and a half to 2 million tons and how much higher that will move our average price.

Gotcha Okay.

Thank you.

Again, if you have a question. Please press Star then 1.

The next question comes from Andrew Love from Hallmark Investment Corp. Please go ahead.

Yes could you give us.

Some lighting on on the.

Possible impact on.

Technological advances in carbon capture and sequestration I noticed that.

The current infrastructure Bill Scott.

$10 billion for I guess for research on that area and does that give us some prospect for relief from the downward pressure of environmental considerations going forward.

Yeah, I think it's very important for the U S government and all governments are you know as they focus on reducing carbon.

You know that really cant be done as on a global scale without.

Carbon capture because he's got.

China and India.

Still building coal fired power plants today brand new plan some are under construction as we speak.

You know we've seen in the last 3 years, you know the United States reduce coal fired generation by.

100 and.

18 Gigawatts.

And you've seen the rest of the world build 121 Gigawatts.

So you know coal demand has gone up not down from a global perspective so.

And I'd say, it's for saying gosh, we've got to put some money into carbon capture and figure this out.

You get.

To get the rest to get the rest of the world too.

2 to buy into this technology eventually so we think you'll see.

Several carbon capture projects.

In the United States, It's a little hard to say where I.

I think 1 of them like Duke energy is Edwards port plant would be a very good candidate for that which is right in our backyard.

<unk>.

But you know it's it's it's a little early to speculate on on bills that haven't passed yet on what the exact ramifications of that are.

But certainly our money towards carbon capture is helpful to the industry.

And.

You know could could be very meaningful.

Thank you.

Thank you.

Again, if you have a question. Please press Star then 1.

The next question comes from Lucas pipes from B Riley Securities. Please go ahead.

Good afternoon, everyone. This is actually Matt key here asking a question for Lucas just a quick 1 for me today are you experiencing any cost inflation related to higher raw material pricing or kind of increased labor costs and if so how do you expect that to kind of impact your operations in the second half of 2021.

Yeah, It's a great question.

We have seen a little bit of inflation on things like roof bolts with steel prices being up.

Oh, we've yet we've yet to see it in labor costs.

And we are you know we are at the same point in time, we are hiring people, which which is challenging the market is tight.

We're really looking to see what happens you know we've got.

The additional.

Funds federal funds for unemployment expiring September 6.

I'm, assuming that doesn't get extended and.

And we're seeing.

Some degree young people that.

I have been taking those funds.

Now as they say all right. We're 25 days out maybe we ought to start interviewing for jobs. So we're seeing a little more.

Activity from you now.

People, who have accepted those funds, saying why I see the end is near its time for me to start.

Getting back into the employment realm.

When we look at <unk>.

Inflationary pressure.

It's a little hard to decipher what is permanent and what is temporary right. What is hey, we're reopening and so there's transportation issues, there's a shortage of something.

We don't think steel prices can stay where they're at so we don't view that as a long term price increase.

But the trick is is too low right now we went on hire more people, but we don't want to you know.

Materially affect our.

Our labor costs. So we're trying to be careful to add as quickly as we can without you know installing permanent change into our cost structure. So so far I think most of the cost increases that we've seen.

Appear to be short term in nature.

Something in the 6 month, well, we'll see if that.

Extends beyond that.

And I think it's going to be more than offset by the gains that we're seeing on on the sales side.

We said, we've seen huge price increase incur.

Increases here in the last 4 months all of that really came in the last 30 days.

No.

You know were trying to.

We're trying to take advantage of that I think our cash flow on the back half of the year is going to be.

Much much stronger than it was in the first half of the year, we're going to use debt to pay down debt and you should see significant.

Deleveraging of our of our company. So that's kind of the trend youre going to see from us in 2020.1.

Got it that's that's very helpful best of luck moving forward.

Alright, thank you.

Again, if you have a question. Please press Star then 1.

There are no more questions in the queue.

This concludes our question and answer session I would like to turn the conference back over to Brent <unk> for any closing remarks.

Yeah.

Well I just want to thank everyone for taking the time to join our call today and.

We look forward to a very strong back half of 2020.1 thank you.

Oh.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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