Q2 2019 Earnings Call
The chorus call leasehold and operator will be with you shortly.
Chorus call my have your first and last name.
First as Elliot yellow iron Ti lessening of Nash and they stage.
What company with.
Era am I right.
Like domestically or with mine plans change I would use it.
Kind of look at that the stress kind of environment.
But again I think if that markets. They distress. A then that's going to put pressure on the higher cost producers.
There.
Our competitors today, and I think that will open up opportunities that yeah.
Yeah, It will allow us to.
Do some transactions.
Without.
Yeah, it's a weird there they would be bringing up production. They would have contracts that would need to be service that type of an arrangement. So.
Yeah, we feel.
Right you know again at this 10 seconds, you know we see our volume.
Next year at least where it is today.
Even in us.
The flat export market, we do both in the <unk> is a flat if you had to price curve, let's say or where the <unk> price curve is today.
Now.
We believe that price curves going to go up as I said earlier, so we're hopeful that.
Yeah, we will be able to maintain or export tons, if not growing back to where we were not the first half of this year, but that will be dependent on the on the <unk> do price curve.
Ah so far as the.
What the other producers do will be the other.
Uh huh.
Unknown right now, but I believe there will be action by others that will bring the supply demand supply demand balance in place, where we can maintain and produce tons at the level. We are this year if not grow it.
All right. Thanks, Joe very helpful. Thanks, Brian .
Yeah. Thanks.
Just as a reminder, if you have a question. Please press Star then one.
Our next question comes from Matthew Fields of Bank of America Merrill Lynch Matthews. Please proceed.
Hey, everyone just want to follow up on that last question about kind of being able to.
You know.
Take exports down, but still maintain sales I guess because of increased domestic car sales.
Do you do you primarily see yourself winning.
Contracts and share over from distressed you know suffering producers in your basins or or or do you see an opportunity to maybe.
When some contracts from PRB producers that are you know you have an enormous cost advantage of especially into the southeast or things like that like what what are these domestic opportunities that are better than export.
I think that.
Yeah.
There could be rationalization by high cost producers it will be cutting back supply.
And that.
They will be giving up market share if they do that.
So I'm not suggesting that we're seeing a growing domestic market.
I'm, suggesting that yes, we will either compete with them and we will be at lower and when that business, because we got low cost operations or.
There will be some form of supply response by the high high cost producers.
That will free that market share up for the low cost gas, which we would be one of those it will be able to take advantage of that.
Do you worry that the companies that are going through bankruptcy is right now black Hawk block jewel et cetera are our pricing irrationally because of their financial distress and actually having the opposite effect.
Well, they're not really competing with us in the thermal coal space.
You know black jewels talking about they're trying to decide where they're going to 11 or salmon and yeah.
A black Hawk I think more focused on the met side of the business. So that you don't really.
Influence Uh huh.
Uh huh.
That outlook that I, just mentioned I think it's going to be the other.
There's a lot of its cloud big Trinity Cambrian right, there's there's a lot.
Yeah, but there you know your question about PRB yeah.
Impacting the markets in the east.
Yeah.
I don't really see.
That happening yeah.
Yes.
Yes, you've seen this significant reduction.
In production and PRB, if it was going to happen it would have happened this year.
I mean, the utilities have decided how much PRB either going on by east of the Mississippi.
And that appears to be pretty constant we do hear some PRB buyers in the east talking about buying more eastern production. So we see it more the other side.
Then PRB coming into the eastern markets.
I mean with transportation costs, you should have a huge cost advantage, especially like into Georgia, and Florida, where.
You know, maybe you could get some more penetration.
Yeah, we could you know again I'm not counting on that I'm not counting on.
The the domestic market mix, changing and I'm not counting on the domestic market growing I'm just saying.
We can absorb if there's no export market or the export market stays flat.
There are opportunities for us to sell coal domestically.
That would be more attractive than selling into the current price curve for a <unk>.
Yeah, I think that was weird that what you were asking earlier now and we would get that by either a bidding.
At a lower point of these other high cost guys decide they want to compete.
Then we could bid at prices, where it's below their cost, but still be profitable for us or.
We can work out a deal.
Where either.
They decided to.
So in a town hall or.
Maybe just the decide to hold off on but by coal or they put on their contracts.
Okay.
That's helpful. I appreciate that color.
Yes on the on the wing acquisition, you guys said, 10% to 15% increase in in mineral royalty EBITDA from wing is that right.
That's about up transaction Paul correct.
Okay. So that's.
37 to 47 of EBITDA, that's about $4 million to $7 million of EBITDA is that the right way to think about it.
That's fair Yeah, Yeah. So for 19, that's for Knight to even than we see.
Both on our existing assets today as well as the drilling and development that's occurring on the wane gossips.
We see line of sight to attractive volume growth heading into the next 18 24 months.
Okay, because I was about to say that's like a 2046 multiple on 19 EBITDA I imagine that's a lower multiple when you take some forward.
Projections on that there's also <unk>, there's also transaction paulson better than that if you exclude those so that's a that's a different dynamic.
Okay.
Alright, great.
And then I'm just you know you mentioned financing with I just wanted to hear hear this again, because I don't think I heard it right you're going to finance the way acquisition with it with a term loan in the third quarter for closing.
No no we have plenty of capacity available on our existing revolver Ah, Okay that will allow us to close the transaction as we look forward. However, we are evaluating options and the bank and the debt capital markets.
To extend our existing credit facility and potentially term out some of the oil and gas activity. We've done this year.
Okay. All right. Thank you for that clarification, and then lastly.
I understand the you know the push to to acquire more oil and gas properties.
And potential coal opportunities that come your way what what are you comfortable levering up the balance sheet to in terms of like a leverage total or a net leverage ratio in order to achieve these strategic goals.
I don't think you would see us lever to a point where in our view, we would be putting our franchise at risk. We have generally been operating you know that one times or less.
You know for a large strategic transaction, we may be willing to go up above that as long as we were I'm comfortable that we had a path to bring it back down into.
You know one in a quarter with a one times over a reasonable period of time, but you wouldn't see us go lever up significantly.
You know the chase deal.
Okay, great and if if.
There was a significant opportunity.
Whether it's an oil and gas or coal and you would lever. It up you know above where you're comfortable would cutting the distribution temporarily probably get back to that so let me.
Rephrase that I would not lever it up above where were comfortable we might lever up above where we have traditionally been operating but the we would only do so we had a view that we can bring that back down to levels that or within our historical past within a reasonably quick period of time.
Okay, Great. That's it for me. Thank you guys very much.
Got it thank you.
[noise].
Our next question comes from Nick Jarmoszuk of Stifel Nicolaus. Please proceed.
Hi, good morning, Thanks for taking the questions on the 2020 domestic book Indicatively can you give us a sense for is that pricing up or down year over year relative to the tons that it's replacing.
It will be down a little bit yeah.
So as late as Mark mentioned earlier, we had talked about.
I was going to ask.
Yeah.
I'm, sorry about that dollar in a quarter a year over year.
And that may be a little bit wider since our last call.
Got it but that the factors in both export and domestic so but.
It's going to be down.
ER compared to this year.
We've got more than likely.
And in the prepared remarks, you commented that are long term positives a fundamental demand for export markets long term and you're seeing more contracting opportunities can you talk about the contracting opportunities that you're seeing what markets, they're going into or how you think about the netback economics of those opportunities.
Yep.
When we sell to.
We sold a 31 different countries I mean, predominantly we're going into.
Or Europe .
Workout and India is where I think 88% of our total volumes go into the remaining 12% is fairly spread.
That's yeah. So there are contracting opportunities in Latin America, they're contracting opportunities in India, there contracting opportunities are in eastern Europe .
Northern Africa. So there are some opportunities for us to lock in volume, sometimes the pricing is set.
Quarterly sums off indexes there are different ways to.
The structure of those contracts, but.
Yeah. So there's.
The ones that I was mentioning specifically was just looking at 29 pain.
There is a possibility that we could you be selling that volume and maybe even more depending on how fast the the price prices rebound.
As the only point I was trying to make.
So with the major markets of Europe Africa, India can you give us a sense for how the mix of export volumes has trended over the past couple of years are you getting more exposure to Africa, and India or is the mix basically stable over the past several years and going forward.
It's been more exposure to.
So those countries away from Europe .
Okay.
Away from Western Europe .
Uh huh.
All right and then last one in terms of the EPA to price.
What sort of range.
Of price given that there are some moving parts of the sulfur discount and freight rates would what range do you need to be breakeven on a netback basis.
Well it varies by.
Operation, So and we don't like to look at [laughter], breaking even or [laughter].
You know, we really are trying to price our product in the export market closer to where 84 would be relative to <unk> to.
So earlier in the year, we were looking at numbers in the eighties mid eighties.
Yeah, we could transact at 70.
Yes, we would like it to be closer to the mid Eightys then those the low seventys. So.
Somewhere in that range would.
Or the opportunities that we could potentially selling to yeah. I mean, we could be profitable at the lower end of that range, but not at margins that we would otherwise like yeah.
Okay.
All right. That's all I had thank you.
You.
Our next question comes from George sign of core partners. George Please proceed.
Hi, guys I wanted to follow up on the consolidation comments you guys made I think in particular.
The opportunity set that you guys are you know probably there are you guys are the biggest Illinois basin producers.
You know the second largest as you know clearly in some having some issues.
I just wanted to kind of check or at least kind of understand how you think about kind of any potential antitrust issues. As you guys think about consolidation opportunities [noise] or Conversely would you guys be targeting nap instead.
[noise] sooner.
I have a hard time understanding how there could be any antitrust issues are in the markets we have today.
With the way you know.
No no natural gas was priced and is setting really the market in large part I think the.
There's plenty of competition for coal thermal coal in particular.
To where.
You know our customers.
Uh huh.
You know have alternatives and so I think everything is back to how do you define markets and.
I think if you define them with the true competition that we feel every day yeah.
Yeah, I think it would be a very very hard argument for.
The government to make that a that the markets would be concerned about a consolidation.
No impact in the coal industry, but.
Yeah.
Yes, we will see what's the how the government reacts.
With the Peabody deal, but.
Yes, just my opinion is that.
I don't see how that they can step in and.
And make a very solid case that fears and I compared it it's impacts by that.
That consolidation.
Yeah I think.
That's unlikely with the crime administration and if that if there would be a change it's really hard for me to see how the Democrats could make a case when they're trying to.
Uh huh.
You know put more constraints on on the go industries I would think they would.
Welcome.
The consolidation effort as opposed to.
Trying to.
You know continue to.
After it will be yeah, Dan.
Yes.
Do you want to step in and interfere with that.
But that's just my view.
[noise] got you I appreciate that secondarily just in terms of kind of diversification is there is there a bias between kind of nap opportunities in Illinois basin as you kind of evaluate the M&A landscape.
And now there's not a bias.
Oh, okay.
That's it for me thanks.
Thank you.
Our next question comes from Lin Shen of Hite Lynn. Please proceed.
Hey, good morning, guys. Thanks for taking the call I just want to clarify for the wind acquisition. So what is your expectation for 2020 EBITDA based on the current strip price.
We haven't provided guidance for 2021.
So is it still the four to 5 million is the annual run rate of call. It 2019 that right no no the transaction didn't occur on January one.
Okay.
No it does not a full year run rate.
Oh, Okay. So nice talking to probably the only if other deal close for the 2019, okay that makes sense.
And also you know you mentioned the natural gas price stays low so if we think about the current natural gas price to dollar $22 30 ish what is the I like prosperity.
Or equivalent to emulate basin coal price you are seeing now it if they want to price father coal when do they come by gas like $2 22, I'm sorry.
Right now.
Yeah.
They win.
Your <unk>.
For the.
People that have coal fired power plants.
Theater consuming elevation cold today, they're not making a gas versus go decision.
Uh huh.
On a daily basis.
So in order for them.
Within their particular generation mix it does influence it but it's further away from the Illinois Basin. The further transportation you go more to gas has an impact.
And we've seen that with.
Uh huh.
Yeah, some reduction in demand this year is strictly for gas but.
For those.
Utilities, there that have go plants, you know committed and they still need to have a large percentage.
Their generation be coal fired.
It does have some influence or.
But it's not as if it's going to be a day to day call on this batch based up to 30 gas. So it's more of a.
And market impact broadly speaking then it is micro.
So we were seeing.
Yeah, we'd like to see it be more to seven to 70, plus or they can then provide the opportunity further away.
You know in southeast say, but.
Uh huh.
Yeah, I think if utilities thought that gas went to me at 230 forever.
It might change.
Some of their plans to build new gas plants, but based on the capacity that exists today.
Yeah coal still has to be in the mix.
In the mid Twentys or a percent.
Marketshare and higher than that really in the regions, where lumpy in our markets here.
You're over 50% in some of these markets close to 60% and some of the market. So.
Okay got it. Thank you appreciate it.
Our next question comes from Mark Levin with Seaport Global Mark. Please proceed.
Yeah, Great just two quick follow up questions from earlier when you think about your EBITDA guidance for 2019, and maybe if you were to carve out oil and gas is there any way to get an idea for how much the export coal business is contributing to your overall coal EBITDA.
Well for the guidance if you look at the.
Yeah. The guidance that we've got 420 19, yeah. We've got we do have a million tons anticipated.
A rapidly or million to 50 or to be sold in the export markets and those are at prices.
There are.
Reflective of the Q4 price curve, so they're quite a bit lower than what the domestic prices.
Yeah got it I guess.
We will be looking to determine whether so.
We'll be looking to determine whether we were going to want to sell into that export market or whether some of these other transactions will come to bear were weak and potentially sale on other people's contract.
Got against other peoples contracts, that's what we would do and you would see.
Some improvement.
No in the midpoint of the EBITDA, that's in our guidance for 2019.
God I guess, what I was after his if he if you took the midpoint of let's just call it $645 million of EBITDA, you back out the oil and mineral expected contribution in the whatever low fortys, you're kind of around 600.
And then if you took that 600 number and you said, okay, well you know.
Five six if it was domestic in a sixth of it is export is that a is that a bad way of thinking about the mix in terms of your contribution out.
Yeah, you Gotta look we're not.
Or if you look at what we have left as to what they influence could be it could be up to $10 million more than the mid point.
If we elect not to sell in the export market if that helps answer your question.
Got it okay. So where we are from here going out to the rest of the year.
So I think there's potentially $10 million a upside if we don't sell in the export market.
And there's some downside if the price curve changes.
Got it no I was just after it for because I think there definitely people out there that fear that you know the export thermal market in 2020 is gonna be so terrible that you know your ability to generate any EBITDA from the export business is going to be so severely constrained. So I was just trying to to just at least frame. What you domestic EBIT coal EBITDA looks like versus export EBITDA that was that was the thought process at least.
Did it anyway I'm sorry.
Well, if we have the persistent I mean, what I've tried to say earlier, maybe I didn't make it very clear if we have a persistent.
Export market that does not improve.
And that volume push back in the domestic market is going to put pressure on the high cost guys.
Right and I think I tell US guys will go out of business.
Got it and it's not all that production back.
And then that will provide us they have an opportunity.
To sell in the domestic market that we would be able to pick up.
And get that market uplift.
That gives you that balance to where year over year.
Yeah, we feel like are earnings will be stable, whether we're in the export market or the domestic market I mean, they they tied together.
In some respects not neither market operates in a vacuum.
Absolutely.
Of course Levered to hold on one side it can get pushed on the other and as we assess our opportunities we're always looking at.
Where can we realized a the highest and best value for our products as we compare those alternatives.
Yeah absolutely.
Dan I think what everyone needs to understand is the demand internationally is growing right.
So uh huh.
So we're seeing growing demand internationally.
No increase in supply.
We believe that that will.
Yeah, the assumption of seeing.
Export prices stay where they are or going back to where they are in June . It's just a very very very big conservative assumption.
So I can understand why people may want to think of it that way.
Then I would just encourage them to look at the the fact that there isn't demand is stable if not growing internationally.
And.
The hedges are coming off and those customers want that cold, they're going to have to pay a price that incents. The producers to produce go and sell into that market. There's no question that the recent markets challenge.
But we absolutely view these circumstances, a cyclical and not structural and as we look forward.
The structural supply demand fundamentals or favorable and we expect we'll be able to take advantage of those.
But Brian maybe I'll ask it another way and you probably don't answer, but what I ask it anyway any any way to say how much EBITDA has come from your export in tons. So far in the first half of the year.
I'm sure, we could calculate that mark but all.
The honest I'm not assessing that on X button that type of basis, no I got it I I. That's fair Yeah. That's fair I was just I was just curious because I was just again just trying to trying to frame. It I understand the markets are completely completely interrelated.
Last question from me is is about Illinois basin pricing. So maybe you can characterize if you were to go out into the market today calendar 2020.
I realize you know there is that you know that the gas isn't terrific at the moment in the weather Hadnt been terribly cooperative for a while but if you wanted to go contract in 2020, where where would you be doing it around around what kind of price range in the Illinois basin.
Now since we are in that market. It's free it's hard to give you that an answer to that question and for competitive reasons. Okay.
Fair enough fair enough all right guys. Thanks very much.
Thank you Mark.
Okay.
This concludes our question and answer session I would like to turn the conference back over to him.
Mr., Brian our control senior Vice President and Chief Financial Officer for any closing remarks.
Oh. Thank you William we appreciate everyone's time this morning as well as your continued support and interest in alliance.
Our next quarterly earnings release, some call will be scheduled for late October and we look forward to discussing our third quarter 2019 results with you at that time.
This concludes our call and again, thank you to everyone for your participation.
The conference is now concluded. Thank you for tens of this presentation you may now disconnect.