U.S. Markets closed

Edited Transcript of HNRG earnings conference call or presentation 12-Mar-19 6:00pm GMT

Q4 2018 Hallador Energy Co Earnings Call

Denver Apr 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Hallador Energy Co earnings conference call or presentation Tuesday, March 12, 2019 at 6:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brent K. Bilsland

Hallador Energy Company - President, CEO & Chairman

* Lawrence D. Martin

Hallador Energy Company - Corporate Secretary, CFO & CAO

* Rebecca Palumbo

Hallador Energy Company - Director - IR

================================================================================

Conference Call Participants

================================================================================

* Ethan Park

Extract Capital - Analyst

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to Hallador Energy's 2018 Full Year Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Becky Palumbo, Director of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Rebecca Palumbo, Hallador Energy Company - Director - IR [2]

--------------------------------------------------------------------------------

Thank you, Andrea. Thank you, everybody, for taking the time today to join us for today's call to discuss our fourth quarter and full year 2018 earnings. If you haven't had time to review our Form 10-K and earnings release we issued yesterday, they're both posted on our website today. This call is being webcast, and a replay will be available on our website along with the transcript later this week.

Participating on today's call with me are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Larry will begin with the financial overview followed by Brent with comments on operations. And after management completes their opening remarks, we will open the line up for Q&A.

Our remarks will include forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially, for example, our estimates and mining costs, future coal sales and regulations regarding the Clean Air Act and other environmental initiatives. We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by law.

Also, I'd like to remind you that we have the reconciliation of the non-GAAP financial measures that we discussed this morning in our press release issued yesterday, which again is posted on our website.

So with that, I will turn the call over to Larry to go over our highlights. Larry?

--------------------------------------------------------------------------------

Lawrence D. Martin, Hallador Energy Company - Corporate Secretary, CFO & CAO [3]

--------------------------------------------------------------------------------

Thank you, Becky. Good afternoon, everyone. I will go over -- I will review the operating results for the fourth quarter and year-to-date.

For the fourth quarter, net income was $2.6 million, $0.09 a share; for the year, $7.6 million, $0.25 a share. Our free cash flow, which is defined as net income plus deferred income taxes, plus DD&A, plus ARO, plus accretion and stock compensation, less maintenance CapEx and effects of our equity method investments, free cash flow was $9.3 million for the quarter, $35.8 million for the year.

Our adjusted EBITDA, which is defined as EBITDA plus stock compensation, plus ARO accretion, less the effects of our equity method investments in Hourglass Sands, adjusted EBITDA for the quarter was $18.7 million and $74.1 million for the year.

We decreased our debt by $11.5 million in the fourth quarter, $13.5 million decrease for the year. We paid dividends of $1.2 million in the fourth quarter, $0.04 a share. Total was $4.9 million or $0.16 a share for year-to-date.

Our bank debt at the end of the year was $188.5 million, and our net debt was $170.6 million at the end of the year. Our debt target for the end of '19 is $155 million and $160 million. That's debt to the bank -- owed to the bank. And our leverage ratio at the end of the year was 2.55x EBITDA -- adjusted EBITDA.

Now I will turn over the call to our CEO, Brent Bilsland.

--------------------------------------------------------------------------------

Brent K. Bilsland, Hallador Energy Company - President, CEO & Chairman [4]

--------------------------------------------------------------------------------

Thank you, Larry. Well, on previous calls, we've spoken a great deal about positioning Hallador to grow our sales, and I'm happy to report that those initiatives have paid off. In 2018, our wholly owned subsidiary Sunrise Coal contracted 12 million tons of additional coal sales for the 2019-2022 time period. As a result, we are raising our 2019 sales guidance to 8.2 million tons annually for -- from 7.3 million tons previously. Additionally, we are forecasting sales of 8 million tons annually for the 2020-2022 time frame.

Currently, we have 78% of our production sold for the next 4 years at an 8 million ton pace. I want to repeat that. We have 78% of our production sold for the next 4 years at an 8 million ton pace. I do not know of another producer in the industry that has hedged that well for the next 4 years.

Additionally, we have nearly doubled the number of power plants we serve from 9 in 2017 to 17 power plants today located in 8 different states. And total estimated coal consumption of our 2018 customers is roughly 43 million tons versus 16 million tons for our 2017 customer base, a 165% increase in demand providing exciting new sales opportunities going forward.

When we look at customer concentration, in 2017, we served 9 plants in 3 states. Estimated demand was 16.2 million tons. We sold 6.6 million tons, thus making us roughly 40%, 41% of our customers' supply. In 2018, we served 17 plants in 8 states with estimated customer demand of 42.9 million tons. We sold 7.4 million tons, which made us 17% of our customers' supply. So our 8 new customers represent an average of roughly 3% of our sales, but each have the ability to become much larger customers in the future.

So this increase in customers is a result of 3 fundamental changes in our market that have increased demand and reduced supply. A large Indiana industrial customer has decided to close their coal mines and purchase coal from Sunrise under long-term contracts. The addition of our Princeton Loop has allowed us to access new markets served by the Norfolk and Southern Railroad. And lastly, a greater percentage of Illinois Basin coal is going to the export market. That is tightening supply. This has led to new customers contracting with Sunrise for the first time.

Now there's been much debate about the sustainability of Illinois Basin exports. IHS Markit reports that for every megawatt of coal-fired power generation that's being closed in the world, mostly in U.S. and Europe, 3 to 4 megawatts coal-fired power generation is being built, mostly in Asia. At this time, we do not see enough new coal supply coming online and feel Illinois Basin coal exports will be needed to meet this new demand throughout the world.

And I think that sentiment is echoed by some of the comments from some of the largest coal producers in the world, such as Glencore or BHP. Glencore recently announced that they'll cap their production at 150 million tons annually and that they see no growth in supply. BHP has stated that steam coal production is not something they will seek to grow in the future, and we certainly have seen comments from other executives in the industry echoing the same sentiment.

So all 3 of these are fundamental changes that we believe are sustainable and will allow Sunrise to ship 8 million tons annually going forward.

We've had a fantastic sales season, and customers will likely be taking a breather from additional contracting until they see what weather the summer brings, but the environment is still ripe for additional sales. According to Platts Analytics, utility coal stocks are 40% below the 5-year average.

On the natural gas front, natural gas inventories are 25% below the 5-year average. So if any weather presents itself this summer, we think the opportunities to make additional sales are certainly present.

Looking at our cost structure. Our cost structure in the first half of 2018 was $26.84. In the second half of the year, it was $30.97. This increase was primarily due to transferring employees and equipment from Oaktown to Carlisle, retraining those employees and reopening a mine that had remained idle for slightly less than 3 years.

For nearly all the second half of 2018, we operated Carlisle with only 1 unit of production, which is very inefficient. However, Carlisle provides us with a slightly different quality that is very desirable, especially in the Southeast. Thus by late December, we had sold enough Carlisle coal to justify adding second unit production at Carlisle, and we have seen a dramatic reduction of the cost structure of that mine. Thus, we are comfortable projecting that our company-wide mine cost will be in the $28 to $30 per ton range in 2019.

Looking at cash flow. Cash provided by operations was $51.6 million for 2018 compared to $65.8 million for 2017. The decrease in cash generation was due to: increasing inventories at locations such as reopening Carlisle and building the inventories back up; opening our new Princeton Loop, getting a base of inventory there; and by and large, we increased inventories at Carlisle -- or excuse me, at Oaktown as well.

Also on the cash flow front, as we previously mentioned, our increased costs associated with reopening Carlisle Mine resulted in tighter margins and lower cash flow generation. We see that trend changing as we have brought on the second unit at Carlisle.

For Hourglass Sands, we have completed 1 of 3 anticipated test wells in the DJ Basin and expect to complete the remainder by the second quarter of this year. In Colorado, we continue to work towards being part of an industry trend of switching to locally produced sand versus frac sand produced roughly 1,000 miles outside the basin.

As I've stated before, we believe frac sand mining is well within our core competency, exceeds our investment criteria, and though we do not expect it to be profitable in 2019, we believe it can meaningfully contribute to Hallador in the future.

Looking at our balance sheet. In the fourth quarter, we reduced our debt by $11.5 million. As Larry previously mentioned, at the end of this year -- or excuse me, at the end of 2018, our debt was $188.5 million, which is a reduction of $13.5 million year-over-year. Our leverage ratio decreased to 2.55x from 2.73x during the quarter and well within our 3.75x covenant. Our liquidity also improved by $5 million in the quarter to a healthy $80 million of liquidity. Our CapEx budget for 2019 is $31 million, of which $22 million is for maintenance CapEx.

In summary, 2018 positioned Hallador for great success going forward. We increased our annual sales pace to roughly 8 million tons annually. We decreased our market concentration by adding 8 new customers and we were able to contract 78% of our sales for the next 4 years, all of which creates great cash flow visibility and value for the Hallador shareholder.

With that said, I'd like to open up the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Lucas Pipes of B. Riley FBR.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [2]

--------------------------------------------------------------------------------

Brent, I wanted to follow up a little bit on the domestic market. It seems like things have been tightening on the seaborne side. However, things maybe have been softening a little bit over the recent weeks. Now what's your sense at this point in time for prices in the domestic market, how utilities are positioned? Do they need to buy more coal? I would very much appreciate your perspective on that and then, of course, especially how Hallador is positioned in the mix of that.

--------------------------------------------------------------------------------

Brent K. Bilsland, Hallador Energy Company - President, CEO & Chairman [3]

--------------------------------------------------------------------------------

Well, I think we believe that utilities do need to buy more coal, and some will take a peek and see what the weather has done. But we've seen several utilities report that their coal inventories levels decreased over the winter months, and some will jump on that earlier than others. Every utility has their strategy, but we are seeing a couple of RFPs now that, quite frankly, have surprised us that they were so big and so early. So we think that there are several domestic utilities that need to buy coal.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [4]

--------------------------------------------------------------------------------

That's good to hear. And do you see longer-term contracts as well? Or do they more -- top things off on a short-term basis?

--------------------------------------------------------------------------------

Brent K. Bilsland, Hallador Energy Company - President, CEO & Chairman [5]

--------------------------------------------------------------------------------

We signed several contracts that were in the 2- to 4-year range, so definitely saw a return to -- from contracts that we haven't seen for several years.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [6]

--------------------------------------------------------------------------------

Very good to hear, great. And then can you maybe provide us a little bit more color on how the restart of Carlisle has been progressing? Any unexpected issues? How would you think about costs at this operation going forward? Would appreciate your update on that situation.

--------------------------------------------------------------------------------

Brent K. Bilsland, Hallador Energy Company - President, CEO & Chairman [7]

--------------------------------------------------------------------------------

Well, so in late July, we restarted that -- or sometime in July, we restarted that mine. There's a period of time there where our unit production was shut down at Oaktown. Some of that equipment and those people were moved to Carlisle, retrained. We restarted that mine.

Any time a mine has sat for almost 3 years, there's certainly -- there's a lot of work to be done to bring that mine back into production condition. And -- but for the most part, we ran it at 1 unit mostly because we thought sales would develop, but they hadn't. Maybe there was a couple month delay there from the time we thought they would develop and they actually developed.

But by, I think, December 18, we added a second unit and we have been pleasantly surprised at what those cost numbers have looked like since we've added that unit. Certainly, there's the potential to run maybe a single mine or unit there later this year if sales continue to progress like we think they might, which will -- production -- getting your production up in any mine helps the cost structure. And we think in general, that's going to help Hallador's cost structure.

I mean, traditionally, we have run somewhere between 6.3 million and 7.4 million tons, and now we're forecasting 8.2 million for this year. And we certainly think the market -- again, we've commented from coal inventories, dramatic improvement over the last 3 years.

And I think there's always -- people say, well, the export market's not the money today, and that's a correct statement. But I mean, the export market can move $30, $35 in a 30-day window. So when the export market decides it wants to come in and buy, that's pretty fast movement.

And so certainly, think that -- when you look at the macro viewpoint of what's going on in the world for coal outside of the U.S., there's a lot of power plants being constructed. Coal is growing outside of the U.S. And because of that, we're seeing a lot of suppliers that have all increased the percentage that they're selling to that market.

And part of that, we've been the beneficiary of improving our logistics with the addition of the Loop, improving the variety of coals that we can sell to the customer with the addition of Carlisle. All of that has allowed us to pick up 8 new customers this year. I mean, going from 9 to 17, that is huge, and some of these customers are quite large. So we think there's going to be add-on tons down the road.

So traditionally, we've not -- once we get in a plant, we have a tendency to stay in a plant. They may vary their volumes up or down, but we have a tendency to stay there. So I think this has been a dramatic change. We worked a long time trying to get into this position. And right at the end of 2018, everything kind of came together. And I think we're in dramatically a better position than we were this time a year ago.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [8]

--------------------------------------------------------------------------------

This is great to hear and congratulations on all that progress. I want to quickly touch on the sand side. Any update on Hourglass?

--------------------------------------------------------------------------------

Brent K. Bilsland, Hallador Energy Company - President, CEO & Chairman [9]

--------------------------------------------------------------------------------

We're still working there and still talking to customers. It's our goal to get our permits in place to where we potentially could be contracting to open something late this year. That being said, we are not in that position at this moment. We're working to get there. So we still like that business, we still like that market, and we're still going to work on it every day.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question will come from Ethan Park of Extract Capital.

--------------------------------------------------------------------------------

Ethan Park, Extract Capital - Analyst [11]

--------------------------------------------------------------------------------

Hi Brent and Larry. Congratulations on the increased sales guidance for 2019, that's great. Maybe this is related to the last question, but let me kind of further ask about the upside for your sales number. So the -- I noticed on the 10-K that your capacity -- annual capacity was 10.5 million tons. So if you can sell more coal in 2019 or 2020, can you comment on how much in ramp-up costs may be associated to a ramp-up from that 8.2 million ton guidance to 10.3 million or 10.5 million even? And also, if you can elaborate a little more on the -- what the per ton production cost may be at 8.2 million and 10.5 million, that would be helpful for me.

--------------------------------------------------------------------------------

Lawrence D. Martin, Hallador Energy Company - Corporate Secretary, CFO & CAO [12]

--------------------------------------------------------------------------------

Well, Ethan, to get to 10.5 million, sales would have to show up, we have extra units. We've talked about this before. We always have units at all of our mines. So if something happens, we can move from that unit to an idle unit and keep production going. So we are set up where we can get to the 10.5 million with very minimal capital investment. There's a few things we'd have to do but nothing major that we would have to do to invest to get to that 10.5 million tons.

The cost structure, I mean, it would come down for sure with Oaktown ramping up to be over the 7 million that we -- that it operated at last year. So I mean, I think our cost structure will come below that $28 to $30 range for sure with the 10.5 million tons sold. I mean, for any business, if you're operating at full capacity, you're going to beat your lowest cost structure.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Brent K. Bilsland, Hallador Energy Company - President, CEO & Chairman [14]

--------------------------------------------------------------------------------

Well, I thank everyone, for taking the time today to join us. We are very excited about what 2019 holds for our company and for our shareholders. And with that, we'll conclude today's call. Thank you.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

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