Hallador Energy Co (HNRG) 2017 Q4 法說會逐字稿

Good day, and welcome to Hallador Energy's Fourth Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Ms. Becky Palumbo, Director of Investor Relations. Please go ahead.

Thank you, Rocco, and thank you today for all of you joining us on our call.

Our Form 10-K was filed with the SEC this morning. And if you haven't pulled out a copy, it is available on our website under the SEC Filings tab. This call is being webcast live on our website and is available for replay, and a transcript will be available later this week.

With me on today's call are Brent Bilsland, our President and CEO; and Larry Martin, our CFO.

Our remarks today 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 in mining costs, future 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 of new information, future events or otherwise, except as may be required by law.

Following our prepared remarks today, Brent will take calls in the Q&A.

So with that, I will turn the call over to Larry.

Thanks, Becky. Good afternoon, everyone. Before we get started with the quarter and the year, I'd like to define some definitions.

First of all, we define adjusted EBITDA as EBITDA plus stock compensation plus ARO accretion, and we define free cash flow as net income plus deferred income taxes, DD&A, ARO accretion and stock compensation less maintenance CapEx.

Okay. So let's get into the numbers. We had net income for the quarter of $21.4 million or $0.69 a share and $33.1 million or $1.08 for the year. We have free cash flow for the quarter of $12.9 million, $58.7 million for the year. Adjusted EBITDA was $17.8 million for the quarter, $83.3 million year-to-date.

We reduced our debt by $8.8 million for the quarter, $36.6 million total debt reduction for the year. We paid dividends of $1.2 million or $0.04 a share for the quarter, $4.9 million or $0.16 a share for the full year.

Our bank debt at the end of December '17 was $202 million, and our net debt net of our cash and marketable securities was $186.1 million. Our debt target for the upcoming year of '18, we expect to owe about $165 million at the end of '18. And our debt-to-EBITDA leverage ratio for '17 was 2.4x Sunrise's only net EBITDA.

So now I'd like to turn over the call to Brent Bilsland, our CEO and Chairman of Hallador Energy.

Thank you all for joining us today. Vic Stabio, our former CEO and Chairman, had a great saying, "Tell me the bad news. The good news will find me." With that said, we are saddened to announce the passing of Vic on March 7th. Vic served as our CEO for 23 years and has presided over the board as Chairman for an additional 4.

During Vic's 27 years with Hallador, he was instrumental in transforming our company from a financially challenged oil and gas exploration company to the successful mining company that it is today. Vic was a wonderful man, a dear friend, and he will definitely be missed. With that, I will now move to what Vic would call the good news.

As we compare 2017 to 2016, there's a lot of good news to report. Our net income was $33.1 million versus $12.5 million for 2016. Now granted, $18 million was attributed to the Tax Act, but without the effects of a lower tax rate lowering our deferred liability, net income is still $15.1 million versus $12.5 million for the prior year.

Revenues did decline year-over-year due to a reduction in our average sale price, but increases in tons sold helped reduce our production costs and led to an improved results in operating cash flow of $61.6 million for 2017 versus $60.9 million for 2016.

Our adjusted EBITDA was $80.3 million for '17 -- excuse me, $83.3 million versus $80.7 million for '16. And adjusted free cash flow improved as well year-over-year, $58.7 million versus $58.3 million for 2016.

Yet another healthy year of free cash flow allowed us to reduce our bank debt from $238.6 million in '16 to $202 million in '17. This $36.6 million reduction in bank debt helped lower our leverage to 2.4x debt-to-EBITDA and is well within our bank covenant -- current bank covenant of 4.25x.

In 2017, our liquidity also improved to a healthy $85 million versus $82 million in '16. Additionally, we anticipate closing on the sale of our ownership in Savoy Energy, an oil and gas E&P based in Michigan, for a net $7.5 million here in the first quarter. These proceeds will be used to further reduce our bank debt.

As we look ahead towards the remainder of this year, we have reaffirmed our projected sales target of 6.8 million tons for 2018. This represents an increased sales volume of 4% over '17 and 8% over '16.

The addition of our new Princeton Loop, a truck to rail facility, is helping grow our sales position, allowing product to find its way to new markets on the Norfolk and Southern Railway. We expect the Princeton Loop to be fully operational in the second quarter.

Thus, we expect 2018 to trend similarly to 2017. Our average coal price is expected to drop roughly $0.80 a ton. However, increased sales volume should help us reduce and/or maintain our cost structure, creating plenty of free cash flow to fund our maintenance capital expenditures, pay dividends and continue to reduce our debt.

We expect the export markets to continue to be strong this year. While we may not directly participate in this market, strong exports help us indirectly with new domestic opportunities, as evidenced by us shipping to 2 new customers in 2018.

Last month, Hallador invested $4 million in Hourglass Sands, LLC, a frac sand mining company in the State of Colorado. Hourglass Sands currently controls a permitted sand reserve near Colorado Springs. We expect to truck shipments to customers in the DJ Basin this summer. To our knowledge, this is the only permitted frac sand mine in the State of Colorado. We hope to be a part of the industry trend of switching to locally produced sand versus frac sands produced 1,000 miles outside the basin.

We feel the frac sand mining is well within our core competency, exceeds our investment criteria, and though we do not expect it to be profitable in '18, we believe Hourglass can be -- can meaningfully contribute to Hallador's earnings in future years.

So with that said, I will open up the call to questions.

(Operator Instructions) Today's first question comes from Lucas Pipes of B. Riley FBR.

First of all, I wanted to add my respects to Vic. I feel very fortunate to have met him and see him as a manager and as a leader, so I'm very sorry about the bad news. On my first question, I wanted to follow up on Illinois Basin dynamics. We hear at the tailwind of the earnings a few of your peers have reported, some of them have commented on the very competitive domestic market dynamics. And Brent, I wanted to get your perspective on that and how you see the domestic market shaking out at this time.

Well, it is competitive. We're seeing more tons go to export than in years past, which has created some new opportunities for us. I think as you look at us and even our competitors, volumes in '18 look to be higher than in 2017 and perhaps, even in 2016. So as we look at the landscape, the trend that has happened is we have seen production come offline both in Indiana and in other states in the Illinois Basin. And I think as a result of which and with the demand to export but also as to some of the supply coming offline, more mines are running at higher capacity factors. So in my opinion, the market is less oversupplied than it has been in years past.

That's interesting and helpful. Maybe I'll come back to the coal side, but very interesting announcement you made regarding Hourglass. And I wondered if you could give us a little bit more color as to the ramp-up of this sand capacity and also if you have a good idea of what the specs are from the mesh size and then also the contracting strategy that you envision for this new asset.

Well, it's -- this is still very new. We just made this investment less than, or roughly 30 days ago, so we're still working on what we envision right now is we've got a permitted reserve, and we would look for a third party to process that sand on our behalf. And we're still working on what exactly that's going to look like once that's nailed down. We've had preliminary conversations with customers, and we have a feel for what we think they want to accomplish, and those discussions will intensify here probably next month. So tentatively, our schedule is to shift test shipments in 2018 and then we would look to see what the relationships look like longer than that. To us, what we think is -- well, with the trend that we're seeing in the industry is it seems like most of the shale plays are using greater volumes of sand and willing to accept lower qualities. And that has kind of led to a transition of people purchasing sands that are locally produced versus sands that are produced 1,000 miles away. So at the end of the day, this really is a transportation play. That's the advantage is that we're 1,000 miles closer to market, and it costs something to go 1,000 miles. So I'm not sure if that answered all of your questions.

Yes, that's helpful. That's helpful. Maybe one follow-up on the sand side. And that's in terms of the size of this asset, are we -- should we be thinking 1 million tons, less than that, more, maybe up to 3 or 5 million tons? What's a good ZIP Code to think about from a size perspective? I know it's preliminary, but kind of your first impression.

Yes. I think part of what we're trying to gauge is what will the market -- how much of our product will the market accept. So I think for starters, somewhere in that 800,000 to 1 million tons is probably the ZIP Code to think about here and for next year. I think in '18, we're really just going to look like the test shipper with smaller volumes and getting comfortable with what the customers would like to see.

Got it. Okay. That's very helpful. And maybe to turn back to the coal side...

And just to follow up one more thing there. If we -- as time goes on, if we decide that the market can handle more of our product, then we will be looking to build and expand facilities to take that volume up to 2 or 3 million tons, if the market can handle it. But we're still trying to determine that. And that's why we say, down the road, we think this is something that could be very meaningful to our earnings, just looking at the transportation advantage and what the volumes could be.

That's the side of access to water? Or is that not necessary?

Well, right now, we will be looking to go through a third party that already has an existing plant. So if they already have water, if we were to build something new, we would have to secure a property that -- we would have to secure water rights, which is just a hurdle that we have to cross. And those processes are ongoing.

Got it. To turn to -- back to the coal side, what is -- what are your latest thoughts on production, both production costs, other mine costs as you look out over the course of 2018 and then also beyond?

Well, I think our cost structure is going to look very similar to 2017. One hand, we're going to run more tons, which is typically beneficial to our cost structure. On the other hand, we do have some inflationary pressures such as labor and steel. But if I had to place a wager, I would say our -- I think, our cost structure has a better chance of being lower in '17 just due to the additional volumes that we anticipate running. And then holding idling costs for...

Carlisle and Prosperity, it -- there'll be -- we're estimating $5 million, Lucas. The last quarter, they were lower than that pace, but there's things that come up. And we're estimating $5 million, which we brought down over the last 2 years quite significantly.

Yes. Yes. I want to say I remember a time when it was still $9 million or so.

And I misspoke there, it's $6 million we're estimating for both, not $5 million. It's $6 million for the year.

(Operator Instructions) And our next question comes from Michael Sepulveda of Meraki Advisors.

I just have one. Given the Hourglass announcement and one of your competitors' comments around investments in energy and oilfield service companies, what should investors be thinking about in terms of consolidation within the Illinois Basin?

I think that we have seen a lot of consolidation, and I think we'll continue to see more consolidation. And I think if you look at the state of Indiana 3, 4 years ago, there were 7 or 8 producers. And today, there's 4 principal producers. And if you look at some of the West Kentucky markets, that was basically consolidated down to 2 large players and 1 or 2 smaller ones. I think that's a trend that will continue. I think all of us, well, I can't speak for the others, but I think for us is we are a mining company, that's our -- a lot of our knowledge base, it is our knowledge base. And so when opportunities come along that we think look, like Hourglass, that we think we have the potential for an above average return on investment and it's 80% of the skill set is what we're doing today. We definitely have some nuances that are particular to sand versus coal, but we're capable of learning those nuances and hiring expertise to fill in our gaps. So we're excited about what we think we found. I don't know if that takes away from our coal position. We're still very much interested, and then we've purchased Vectren Fuels in '14. We purchased some of our other competitor assets in '16. That doesn't mean we wouldn't be interested in doing that in '18. It's just we have to find the right assets at the right price. And -- but today, we are very excited about what we found in Hourglass Sands and think that return on investment, we think, could be above average. So that's the decision we decided to make.

(Operator Instructions) I'm showing no further questions. I'd like to turn the conference back over to the management team for any closing remarks.

Well, thank you, everyone, for taking the time to listen to our call. And Lucas, I appreciate your kind words about Victor. He truly was a special man and friend. And we'll -- as he says, we'll get back to work. So thank you.

And thank you, sir. The conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.