Hallador Energy Company (HNRG) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the Hallador Energy Company First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Becky Palumbo. Please go ahead.
Becky Palumbo: Thank you, . Yesterday afternoon Hallador Energy released its first quarter 2021 financial and operating results on Form 10-Q and issued a press release containing 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, we’ll open up the call to your questions.
Larry Martin: Thank you, Becky. Good afternoon, everyone. Before I get started I’d like to define a couple of definitions for our items that I’m going to go over. We define free cash flow as net income plus deferred taxes, plus depreciation, depletion, and amortization; changes in fair value of hedges and stock compensation, less maintenance CapEx, and the effects of our equity-method investments. We define adjusted EBITDA as EBITDA plus compensation, and changes in fair value of hedges less the effects of our equity method investments. So, for the quarter, we had a net loss of $1 million or $0.03 a share. We 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 turn the call over to Brent Bilsland, our CEO.
Brent Bilsland: Hi, 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 increased productivity has yet to be turned into cash as shipments were interrupted due to the coldest February in 30 years. Though the cold weather has delayed our cash flow, it has led to continued improvement in market conditions, which allowed us during the quarter to increase our sales by roughly 400,000 tons for the year. In Q1 production costs were $28.88 a ton, roughly $5 a ton lower than last quarter and significantly lower than Q1 2020 cost of $31.67. Looking just at Oaktown, its costs were $27.21 for Q1, 2021 versus $29.92 for Q1, 2020. Hallador’s excellent operating results will be turned into cash soon as 180,000 tons of Q1 shipment delays will be delivered in the second and third quarter, resulting in roughly 1.8 million of additional EBITDA for .
Operator: First question comes from Lucas Pipes with B. Riley Securities. Please go ahead.
Lucas Pipes: Hey, good afternoon, everybody. And thank you very much for your very interesting comments just now. I first wanted to ask a little bit about the current market environment. You mentioned strengthening prices, internationally domestically, but I wondered if you could maybe hone in a little bit on the Illinois basin, and what you're seeing there specifically are? Where would you put pricing for average products today? And what sort of term business might be available? Would appreciate your thoughts on that.
Brent Bilsland: Well, you know, today, as far as term goes, we've seen, if you kind of look back, last year, energy demand was way down, the struggling economy with the COVID pandemic, but yet most utilities had more than needed. So, everyone kind of went in the last winter pretty long in their positions. October was , November was terrible, December, January were good, and February was fantastic from a demand perspective. So, we've seen coal inventories kind of come back into alignment to, you know, everyone is starting to look at much more comfortable levels. You know, I think that, on one hand utilities are looking at – it’s been long and wrong over the last several years, and they've taken some heat over that at their various, you know, regulatory committee committees. So, they've had a desire to stay shorter. When gas prices popped here in the last month, I think that made them all say, you know, demands better than we thought and we need to run out and buy some coal.
Lucas Pipes: Very, very helpful. Thank you for that color. And then, you touched on a couple of really interesting points in your prepared remarks, and specifically around the kind of tying a rising interest rate environment to valuations in the coal and EMP sectors. I want to pull on the spreads a little bit and ask you, if we are in a rising interest rate environment, what are the implications for this renewable energy transition directly? Obviously, makes capital more expensive, but would appreciate your thoughts on that.
Brent Bilsland: Well, I think that, you know, it definitely raises the cost of any new construction, right. So the higher capital cost, all this new generation is, is going to have to be paid for, potentially with rising interest rates. Certainly, the Fed is doing everything in its power to at or near zero, very low. But the question becomes is, you know, if we start to see inflation, you know, are people going to buy 10-year treasuries at 1.5% yield if we have 3% inflation? So, can the Fed keep interest rates low forever? I don't know the answer to that. I think that there's far less risk for that in the coal space, because if you look at the coal group that already has high interest rates, I mean, look at the coal spaces, bonds are trading anywhere from 7% to 36%, depending on who the group is, and to me, especially as we start to see a return to longer-term coal supply contracts. And I think as time goes on, it will become more evident that we're not going to be carbon free electricity by 2035. It's going to be something longer, like 2050, like all these utilities are signaling, right, just to comply. If we want green energy part of the time, then it can be done. It’s 24/7 and the resiliency that we want when it's cold in Texas and nobody was expecting it. That's where it becomes really difficult. So, I think that higher interest rates, I think it will affect renewables that have yet to be built. It will just make their cost profile go up. Now, people are still going to pay that for that. It works, right. It's just a matter of cost. What will people pay? But I think the transition and the point of all my comments really were two-fold. One is, this transition is going to take much longer than people think, and because of that, there's going to come a point in time where this risk premium that people are putting on the coal space, I think has a potential to alleviate, right. We traded at 7x. Our enterprise value was 7x 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 is long-term contracts, right. So, as we see a return to the long-term contracts, I think that the risk premium could start to alleviate. So, we'll see. I also think that, I mean, I know most of the CEOs of all these different companies, and they all, you know, held they're signaling, their public calls – they’re trying to figure out, if our customers want to make a change, great. So, we've got to figure out how to meet their goals and their needs. And, you know, we have decades, multiple decade long relationships with, you know, 19 different utilities and industrial customers here in the U.S. So, I think those people do want to transition. Everyone has a different timing for that transition, but I think by and large, those customers who are signaling to us they want to do that with a familiar face, can we help them? And that's also part of the reason when those discussions that we think this transition period is much longer than what the press might have the ability. So, for both of those two reasons. When I look at us, and I look at you and our competitors, I think the opportunity for all of these energy companies to trade at a higher multiple is greater than its opportunity – than its probability of trading at a lower multiple in the future.
Lucas Pipes: Very helpful. And last one for me, you mentioned inflation earlier, are you seeing inflationary pressures? If so, where? I’d assume are getting more expensive? We 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.
Larry Martin: Well, yeah, I'd like . Definitely, yeah, steel prices are out costing more bits are costing more. We were able to get our cost round significantly for the quarter. So, kudos to our production team for that. Labor, you know, I think that, you know, today we've been able to find good people to do the work and retain those people. Our jobs are typically the highest paying in the counties that were in. You know, so far, so good. I'm not saying that we're not – could labor become an inflationary issue down the road? It certainly could. And we just haven't – we haven't experienced that quite yet.
Lucas Pipes: Thank you very much, and continued best of luck.
Brent Bilsland: Thank you, Lucas.
Operator: Our next question comes from Rob Lietzow with Lakeway Capital. Please go ahead.
Rob Lietzow: 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, when might that be something you would be considering putting back in? Obviously, that would probably help your stock price as well.
Brent Bilsland: Yeah, I think that when our company gets under 2x debt-to-EBITDA we'll consider it. But prior to that, it's unlikely. You know, our first goal is to preserve our balance sheet, so that we can make the necessary changes that we see coming down the road. And that might mean investments in slightly different types of assets than we've invested in the past. And so, we're just really trying to keep our balance sheet to where we can be in position to take advantage of that. I mean there's – the grid is in a period of transition. I think that's going to take decades, not a couple of years. But still, when we think about the grid it's fairly rapid change, right? It took 100 years to build. It's going to take 20 something, to change. 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 all that's a really long way of saying, we probably won't pay a dividend until we're under 2x debt-to-EBITDA.
Rob Lietzow: Okay, that's fair enough. I think you're not that far away from that. It’s the way you’re generating cash right now, so seems reasonable. Thank you.
Brent Bilsland: Thanks for your question.
Operator:
Larry Martin: All right, with that – oh wait, we've got somebody coming in.
Operator: With no other questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brent Bilsland for any closing remarks.
Brent Bilsland : I want to thank everyone for taking the time today to listen to our call and their continued interest in Hallador Energy. Thank you very much.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
