Sunday, October 23, 2016

Why I held on to Cloudpeak Energy



Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!




Whaddup guys, in this article I’ll be discussing an investment I made a long time ago but for some reason didn’t write about. Aight, I’ll be straight with you. The reason I didn’t write about it was because I was a procrastinating asshole at first, and depressed about the investment later when the stock plunged. The stock finally rebounded, and I recently sold about 40% of my investment in Cloudpeak Energy for an approximately 20% return on the dollar-cost averaged purchase price (this return excludes fees and forex gains/losses).

Update on the Greedy Dragon portfolio: Other than selling 300 shares in Cloudpeak Energy, I also bought 90 shares in Skechers after the stock plunged due to missing earnings estimates or something.

The main reasons I held on to Cloudpeak’s stock was because the company had liquidity AND its operations wasn’t hemorrhaging cash. We’ll take a look at the company’s financial position and performance during the 1st quarter of 2016, as that was when the effects of the warm winter could clearly be seen in terms of significantly reduced coal shipments. Cloudpeak had $79.39 million in cash and cash equivalents as at March 31, 2016. The company had a credit facility with a borrowing capacity of $457.1 million, and an accounts receivable securitization program which would have allowed for $21.2 million of borrowing capacity as at March 31, 2016. However, the borrowing capacity under the credit facility is at risk of being reduced if the company’s EBITDA continues to decline. There were no borrowings outstanding under the credit facility and the accounts receivable securitization program as at March 31, 2016.

More important than liquidity, though, is the motherfucking cash flow. I didn’t want my investment in Cloudpeak to do me the same way my horrendous investment in Alpha Natural Resources did me (Alpha declared fucking bankruptcy despite reporting over a billion dollars in cash and short-term investments in the quarter before it filed). For the first quarter of 2016, the company had an adjusted EBITDA of negative $1.3 million. The company’s interest expense was $11.05 million in the first quarter of 2016. There’s no 2 ways about it, the company had a really bad quarter. Management, however, expected coal shipments to increase significantly in the second half of the year. Cloudpeak would barely be out of cash flow positive territory at the low end of 2016 adjusted EBITDA guidance of $75 million, the high end of capex guidance of $35 million, and $41 million in estimated cash interest.

Of course there is a risk that things could be even worse than the guidance. But I don’t think that actual EBITDA will stray far from the guidance range as Cloudpeak has already committed to sell, at fixed prices, approximately 63 million tons of coal in 2016. The company’s guidance for 2016 coal shipments was between 60–65 million tons as at March 31, 2016. Even if customers wanted to reduce their contracted volume, the company would still get some compensation in the form of contract buyouts (as was the case in the second quarter of 2016). As at March 31, 2016, the company has committed to sell 42 million tons of coal in 2017, with 39 million tons being under fixed-price contracts.

So, why didn’t I buy more Cloudpeak when its stock got absolutely destroyed? I mean the fucking stock was trading at barely above a dollar for a bit. I could have set myself up for that illusive “fuck you money” that I’ve been chasing since the time I was watching Lizzie McGuire on the Disney channel way back when. Well, there was too much uncertainty for me at the time. The warm winter in combination with asinine regulations and cheap natural gas had significantly tanked coal demand. I was also overexposed to the natural resource sector. And I got to admit, the losses from my natural resource investments (some paper, some real)  had got me rattled. I had no idea how far coal consumption and the price of coal could fall. Then the hot summer came and the shares of coal companies experienced a nice rebound from their lows. Right now I'm still not sure if the coal industry is finally coming back to life. That’s why I decided to only sell some of my shares in Cloudpeak, and wait on more information before making any more moves.

Another thing I learned from my investment in Cloudpeak is to pay attention to any throughput or transportation agreements that a natural resource company might have. Cloudpeak has significant take-or-pay contracts for rail and terminal capacity which requires it to pay for a minimum quantity of coal to be transported regardless of whether it sells any coal. This could be a problem if the price of coal drops below the cost of producing and transporting the coal, which it did. Cloudpeak has amended its transportation and throughput agreements to mitigate the losses from its logistics segment. Investors analyzing coal companies should also look at whether the company engages in self-bonding. Self-bonding is where a mining company doesn’t need to have any collateral or surety bonds for its reclamation obligations. However, if the company’s self-bonding status is revoked, it may have to turn to the corporate surety market and may have to put up significant collateral to get the surety bonds. I think that Cloudpeak’s management acted prudently by trying to transition the company fully to  third-party surety bonds.

Despite a really shitty start, 2016 appears to be shaping up to be a pretty good year for me. I hope that your investments have been treating you right as well. Anyway, thank you for reading. Take care and stay rational.

2 comments:

  1. Good article, yep coal/O&G not looking good for 2-3 years from now..bcoz im working in this industry..Perisai might be the first to go out

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    1. Hi, until the past few months coal and oil have been terrible. Oil in the near term probably depends on whether OPEC can come to a deal. Coal companies can breathe a sigh of relief as Trump got elected. And despite Trump's faults, I think he will not stifle the coal industry like how Obama has (hopefully Trump even deregulates the coal industry). But another warm winter could have a significant negative impact on coal prices in the US. For Malaysian O&G stocks which engage in rig building and other oil facilities construction, well you will have a much better feel than me when things start to get better as you actually work in the industry.

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