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BBT Capital Markets 20150311
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March11,2015
Estimate ChangeCoal
MarkA.Levin / (804) 782-8856 / [email protected] / (804) 787-8259 / [email protected] / (804) 782-8799 / [email protected]
Hallador Energy Company (HNRG - $12.22) Buy
COMPANY STATISTICS12-month Price Target: $14.0052-wk Range: $8.22 - $14.35Market Capitalization (M): $340Avg Daily Vol. (000): 73Dividend: $0.16Yield: 1.3%Debt/Total cap: 61.7%Shares Outstanding (M) fd: 27.8Current Quarter Estimate: $0.33Current Quarter Consensus: $0.40
INVESTMENT THESISHallador Energy is a low-cost producer in the fastest-growingcoal basin in the US. The company has a strong balance sheet,excellent FCF, and potentially strong organic growth in the futurethrough the development of their Bulldog Mine.
FINANCIALSFYE Dec 2013A 2014A 2015E 2016E 2017E
Op EPS Q1 $0.19 $0.12 $0.33 -- --
Q2 $0.19 $0.10 $0.38 -- --Q3 $0.17 $0.05 $0.39 -- --Q4 $0.16 $0.34 $0.41 -- --
Total $0.71 $0.60 $1.50 $1.58 $1.85Consensus -- -- $1.71 $1.33 -
Prior Op EPS Q1 -- -- -- -- --
Q2 -- -- -- -- --Q3 -- -- -- -- --Q4 -- -- -- -- --
Total -- -- $1.10 $1.10 --
EBITDA (M) Q1 $11.9 $10.1 $30.3 -- --Q2 $16.4 $9.1 $31.8 -- --Q3 $11.6 $10.5 $31.9 -- --Q4 $11.2 $27.3 $32.5 -- --
Total $50.9 $57.1 $126.6 $126.4 $132.5
COMPANY DESCRIPTIONHallador Energy is one of the lowest-cost steam coal producersin the Illinois Basin. Through the company's 100% ownershipof Sunrise Energy LLC, Hallador shipped 5.4M tons in 2014at a cash cost of $31.43/ton. The company also owns a 40%interest in a private oil producer (Savoy Energy) with operationsin Michigan.
HNRG: Notable Cost Reduction Leads to Q4 BeatKEY TAKEAWAY
Following their $311M acquisition of Vectren's coal business last August, HNRG'smanagement hoped to have costs back under $30/ton by Q1. They hit their target aquarter early. Fourth quarter costs came in at $29.61/ton, materially lower than our$32.45/ton estimate. It also marked a $5.69/ton sequential improvement. This ledto Q4 EBITDA of $27.3M, besting our estimate of $24.6M and consensus of $23.2M.Furthermore, management believes they will be able to maintain their cost structurebelow $30/ton in 2015 (BB&T previous estimate=$31.52/ton). Based on our updatedestimates, we have HNRG generating $2.50+/sh of FCF over the forecast period. Thisshould help pay down debt from the Vectren deal quickly. With the shares valued atonly 4.1x estimated 2016 EV/EBITDA (peer average=13.5x), we reiterate our Buy ratingand $14/sh target. Our target implies 16% potential upside (inclusive of dividend) andassumes the shares are valued at 4.5x estimated 2016 EV/EBITDA.KEY POINTS
Lower costs the big story in Q4. Much of the coal industry was hampered by poorrail service throughout 2014, HNRG included. Throw in an acquisition that essentiallytripled the size of the company, and you can begin to understand why HNRG's Q3costs grew to $35.30/ton versus the previous six quarter average of $29.84/ton. ForQ4, management delivered on their expectation for lower costs, returning them tothe sub-$30/ton level. This helped generate EBITDA of $27.3M, ahead of both ourestimate of $24.6M and consensus of $23.2M. Shipments were slightly lower thananticipated (actual=2.3M tons; BB&T=2.4M tons), but the combination of modestlybetter pricing (actual=$43.95/ton; BB&T=$43.24/ton) and the aforementioned costimprovement (actual=$29.61/ton; BB&T=$32.45/ton) resulted in a margin of $11.90/ton, the company's highest since Q2 2013.
Momentum should continue into 2015. For the full-year 2015, management believesthey will be able to maintain their cost structure below $30/ton. The company hasalready made several changes designed to improve transportation in 2015 and seesthe results as encouraging thus far. In fact, on the call management pointed out thatJanuary was "quite good" from a cost perspective and that the first half of February was"excellent" before snow fouled things up a bit. Notably, HNRG is essentially sold out in2015 at an average price of $44.68/ton. Given weak coal markets (largely a function of$2.73 gas prices), this is a big plus. We are forecasting full-year 2015 shipments of 9.5Mtons (implies 99% priced/committed) at $44.66/ton. Based on our revised shipmentestimates, Hallador also has ~35% of its tons priced for 2016 at an average of $44.03/ton and ~15% at an average price of $44.39/ton for 2017.
Estimates raised; maintaining Buy rating. Based on full-year 2014 results andmanagement commentary on the call, we expect Q1 2015 EPS/EBITDA/FCF of $0.33/$30.3M/$17.6M. We are adjusting our full-year 2015 EPS/EBITDA/FCF estimates from$1.10/$117M/$56.0M to $1.50/$127M/$70.3M. Our 2016 estimates also increase to$1.58/$126M/$74.2M versus $1.10/$117M/$55.9M previously. We assume $43/tonon all unpriced Illinois Basin tons, which admittedly is looking a bit aggressive in thecurrent sub $3 gas environment. We also anticipate that HNRG will lower costs/tonfrom $31.43 in 2014 to $29.98 in 2015 and to $29.22 in 2016. Capex for 2015 and2016 is pegged at $37.6M and $38.4M, respectively. On our updated estimates, sharesof HNRG are trading at 4.1x 2016E EV/EBITDA versus peers at 13.5x on average. Wereiterate our Buy rating and $14 price target based on 4.5x 2016E EV/EBITDA.
For required disclosures, including analyst certification, please referto the important disclosures section on page 5 of this reportConsensus estimates from FactSet
Valuation Methodology & Risk ConsiderationsWe are maintaining our Buy rating and $14 price target on shares of Hallador Energy (HNRG). Our $14price target equates to an EV/EBITDA multiple of 4.5x on our 2016 estimate versus the stock's current 2016multiple of 4.1x and the group average (ex. HNRG) of 13.5x.
Risks associated with an investment in HNRG and to achieving our price target include but are not limitedto: limited trading liquidity, risks associated with distributions by Yorktown Energy, market conditions andIllinois Basin thermal coal prices, cost inflation, regulatory risk, and customer concentration risk.
Hallador Energy Company Company Report
Page 2 of 6
HALLADOR ENERGY COMPANYConsolidated Earnings Forecast
Last Updated: March 10, 2015
($ in millions)
Year Year Q1 Q2 Q3 Q4 Year Year Year
2013A 2014A 2015E 2015E 2015E 2015E 2015E 2016E 2017E
Revenues
Coal sales $1 37 .4 $233.9 $1 04.9 $1 05.6 $1 05.5 $1 06.0 $422.0 $41 6.3 $41 9.1
Gain on sale of unprov ed oil & gas properties 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Equity income - Sav oy (40% interest) 5.8 5.3 0.6 0.6 0.9 0.9 3.1 4.6 5.2
Equity income - Sunrise Energy 0.6 0.2 0.1 0.1 0.1 0.1 0.4 0.4 0.4
Other income 1 0.0 1 .7 0.5 0.5 0.5 0.5 2.0 2.0 2.0
Total Rev enues $1 53.9 $241 .2 $1 06.1 $1 06.8 $1 07 .0 $1 07 .5 $427 .5 $423.3 $426.6
Costs & Expenses
Cost of coal sales 92.9 1 69.7 7 1 .4 7 0.6 7 0.7 7 0.6 283.3 280.6 27 7 .6
DD&A 1 8.6 29.3 1 4.1 1 4.2 1 4.2 1 4.2 56.7 57 .6 58.2
Coal exploration costs 2.4 2.4 0.6 0.6 0.6 0.6 2.5 2.5 2.5
SG&A 7 .7 1 2.0 3.8 3.8 3.8 3.8 1 5.1 1 3 .8 1 4.0
Interest expense 1 .5 1 7 .1 4.0 3.7 3.4 3.1 1 4.2 9.4 4.6
Total costs & expenses 1 23.1 230.5 93.9 92.9 92.6 92.4 37 1 .8 363.9 356.9
Income before income taxes 30.8 1 0.7 1 2.2 1 3.9 1 4.4 1 5.2 55.7 59.4 69.7
Income tax (7 .7 ) (0.5) (3 .1 ) (3 .5) (3 .6) (3 .8) (1 3 .9) (1 5.4) (1 8.1 )
Net Income $23.2 $10.2 $9.2 $10.4 $10.8 $11.4 $41.8 $44.0 $51.6
Noncontrolling interest
Net Income attributable to Hallador Energy $23.2 $10.2 $9.2 $10.4 $10.8 $11.4 $41.8 $44.0 $51.6
One-time items (2.7 ) 7 .0
Adjusted Net Income attributable to Hallador Energy $20.4 $17.2 $9.2 $10.4 $10.8 $11.4 $41.8 $44.0 $51.6
EPS (Basic) $0.81 $0.36 $0.32 $0.36 $0.37 $0.39 $1 .45 $1 .53 $1 .7 9
EPS (Diluted) $0.80 $0.36 $0.33 $0.38 $0.39 $0.41 $1.50 $1.58 $1.85
Adjusted EPS (Basic) $0.7 2 $0.60 $0.32 $0.36 $0.37 $0.39 $1 .45 $1 .53 $1 .7 9
Adjusted EPS (Diluted) $0.71 $0.60 $0.33 $0.38 $0.39 $0.41 $1.50 $1.58 $1.85
Weighted av g. units outstanding - basic 28.6 28.8 28.8 28.8 28.8 28.8 28.8 28.8 28.8
Weighted av g. units outstanding - diluted 28.8 28.8 27 .8 27 .8 27 .8 27 .8 27 .8 27 .8 27 .8
EBITDA $50.9 $57.1 $30.3 $31.8 $31.9 $32.5 $126.6 $126.4 $132.5
Effectiv e tax rate 24.9% 4.5% 25.0% 25.0% 25.0% 25.0% 25.0% 26.0% 26.0%
Free cash flow:
EBITDA $50.9 $57 .1 $30.3 $31 .8 $31 .9 $32.5 $1 26.6 $1 26.4 $1 32.5
Interest expense (1 .5) (1 7 .1 ) (4.0) (3 .7 ) (3 .4) (3 .1 ) (1 4.2) (9.4) (4.6)
Capex (31 .4) (25.8) (7 .6) (9.0) (1 0.0) (1 1 .0) (37 .6) (38.4) (38.8)
Div idends (3.5) (4.8) (1 .1 ) (1 .1 ) (1 .1 ) (1 .1 ) (4.5) (4.5) (4.5)
Free cash flow $1 4.5 $9.3 $1 7 .6 $1 8.0 $1 7 .4 $1 7 .3 $7 0.3 $7 4.2 $84.7
FCF/share (diluted) $0.50 $0.32 $0.63 $0.65 $0.63 $0.62 $2.53 $2.67 $3.04
Coal Operational Data
Price Realizations ($/ton) $43.1 1 $43.33 $44.55 $44.65 $44.7 0 $44.7 2 $44.66 $43.36 $43.21
Cost of coal sales ($/ton) $29.1 4 $31 .43 $30.32 $29.85 $29.95 $29.80 $29.98 $29.22 $28.62
Gross Margin ($/ton) $1 3.97 $1 1 .90 $1 4.23 $1 4.80 $1 4.7 5 $1 4.92 $1 4.68 $1 4.1 4 $1 4.59
Shipments (tons in millions) 3 .1 88 5.398 2.355 2.365 2.360 2.37 0 9.450 9.600 9.7 00
Committed & priced tons 9.341 3.369 1 .450
Unpriced tons 0.1 09 6.231 8.250
% committed & priced 99% 35% 1 5%
Av erage price on committed & priced tons $44.68 $44.03 $44.39
Av erage price assumption on unpriced tons $43.00 $43.00 $43.00
E=BB&T Capital Markets estimate.
Hallador Energy Company Company Report
Page 3 of 6
HALLADOR ENERGY COMPANYConsolidated Earnings Forecast
Last Updated: March 10, 2015
($ in millions)
Year Year Year Year Year
2013A 2014A 2015E 2016E 2017E
Cash Flow
Net income $23.2 $1 0.2 $41 .8 $44.0 $51 .6
DD&A 1 8.6 29.3 56.7 57 .6 58.2
Deferred income taxes 7 .4 (1 .7 ) 0.0
Other (22.0) 1 8.1 0.0
Cash flow from operations 27 .2 55.9 98.5 1 01 .6 1 09.8
Capital expenditures for coal properties (31 .4) (25.8) (37 .6) (38.4) (38.8)
Capital expenditures for unprov ed oil & gas properties 0.0 0.0 0.0
Inv estment in Sunrise Energy JV 0.0 (31 1 .5) 0.0
Proceeds from CDs 0.0 0.0 0.0
Proceeds from sale of unprov ed oil & gas properties 0.0 0.0 0.0
Other (2.6) 0.0 0.0
Cash from (for) inv esting (34.0) (337 .3) (37 .6) (38.4) (38.8)
Proceeds from bank debt 4.6 350.0 0.0
Pay ments of bank debt 0.0 (59.7 ) (40.0) (50.0) (50.0)
Div idends (3.5) (4.8) (4.5) (4.5) (4.5)
Acquisition of remaining 20% interest in Sunrise 0.0 0.0 0.0
Stock option buy out for cash 0.0 0.0 0.0
Proceeds from stock sale 0.0 0.0 0.0
Tax benefit from stock-based compensation 0.0 0.0 0.0
Other 0.0 (6.9) 0.0
Cash from (for) financing activ ities 1 .1 27 8.7 (44.5) (54.5) (54.5)
Increase (decrease) in cash (5.7 ) (2.8) 1 6.4 8.7 1 6.5
Beginning cash 21 .9 1 6.2 1 3.5 29.9 38.6
Ending cash $1 6.2 $1 3.5 $29.9 $38.6 $55.1
Balance Sheet
Cash & equiv alents $1 6.2 $1 3.5 $29.9 $38.6 $55.1
Certificates of deposit 0.0 1 .7 1 .7 1 .7 1 .7
Prepaid Federal income taxes 4.7 5.8 5.8 5.8 5.8
Accounts receiv able 1 0.6 27 .3 27 .3 27 .3 27 .3
Coal inv entory 4.8 1 9.7 1 9.7 1 9.7 1 9.7
Parts and supply inv entory 2.8 1 4.9 1 4.9 1 4.9 1 4.9
Other long-term assets 0.3 1 .6 1 .6 1 .6 1 .6
Total current assets 39.4 84.4 1 00.8 1 09.5 1 26.1
Property , plant and equipment, net 1 82.3 457 .6 438.5 41 9.3 399.9
Inv estment in Sav oy 1 6.7 1 3.9 1 3.9 1 3.9 1 3.9
Inv estment in Sunrise Energy 4.6 4.8 4.8 4.8 4.8
Other 1 7 .4 1 8.8 1 8.8 1 8.8 1 8.8
Total assets $260.4 $57 9.6 $57 6.9 $566.4 $563.6
Current portion of bank debt 0.0 21 .9 21 .9 21 .9 21 .9
Div idends pay able 0.0 0.0 0.0 0.0 0.0
Accounts pay able and accrued liabilities 1 0.4 28.1 28.1 28.1 28.1
Income taxes 0.0 0.0 0.0 0.0 0.0
Interest rate swaps, at estimated fair v alue 0.0 0.0 0.0 0.0 0.0
Total current liabilities 1 0.4 50.0 50.0 50.0 50.0
Bank debt, net of current portion 1 6.0 284.5 244.5 1 94.5 1 44.5
Interest rate swaps, at estimated fair v alue
Deferred income taxes 43.3 41 .6 41 .6 41 .6 41 .6
Asset retirement obligations 5.3 1 2.1 1 2.1 1 2.1 1 2.1
Other 2.1 1 .6 1 .6 1 .6 1 .6
Total liabilities 7 7 .1 389.7 349.7 299.7 249.7
Total shareholders equity 1 83.3 1 89.9 227 .2 266.7 31 3.8
Total liabilities & shareholders equity $260.4 $57 9.6 $57 6.9 $566.4 $563.6
E=BB&T Capital Markets estimate.
Hallador Energy Company Company Report
Page 4 of 6
IMPORTANT DISCLOSURES
Price Chart
BB&T Capital Markets rating distribution by percentage (as of March 11, 2015):All companiesunder coverage:
All companies under coverage to which it has providedinvestment banking services in the previous 12 months:
Buy (1) 44.90% Buy (1) 23.48%Hold (2) 54.08% Hold (2) 20.13%Underweight/Sell (3) 0.68% Underweight/Sell (3) 50.00%Not Rated (NR) 0.34% Not Rated (NR) 0.00%
BB&T Capital Markets Ratings System:The BB&T Capital Markets Equity Research Department Stock Rating System consists of three separate ratings. The appropriate rating is determined by a stocks estimated12-month total return potential, which consists of the percentage price change to the 12-month price target and the current yield on anticipated dividends. A 12-month pricetarget is the analysts best estimate of the market price of the stock in 12 months. A 12-month price target is highly subjective and the result of numerous assumptions,including company, industry, and market fundamentals, both on an absolute and relative basis, as well as investor sentiment, which can be highly volatile.The definition of each rating is as follows:Buy (1): estimated total return potential greater than or equal to 10%, Hold (2): estimated total return potential greater than or equal to 0% and less than 10%, Underweight(3): estimated total return potential less than 0%B: Buy H: Hold UW: Underweight NR: Not Rated NA: Not Applicable NM: Not Meaningful SP: SuspendedStocks rated Buy (1) are required to have a published 12-month price target, while it is not required on stocks rated Hold (2) and Underweight (3).
BB&T Capital Markets Equity Research Disclosures as of March11,2015BB&T Capital Markets makes a market in the securities of Hallador Energy Company.BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Hallador Energy Company in the next three months.An affiliate of BB&T Capital Markets received compensation from Hallador Energy Company for products or services other than investment banking services during the past12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
For valuation methodology and related risk factors on Buy (1)rated stocks, please refer to the body text of this report or to individual reports on any covered companiesreferenced in this report.The analyst(s) principally responsible for preparation of this report received compensation that is based upon many factors, including the firms overall investment bankingrevenue.
Analyst CertificationThe analyst(s) principally responsible for the preparation of this research report certify that the views expressed in this research report accurately reflect his/her (their)personal views about the subject security(ies) or issuer(s) and that his/her (their) compensation was not, is not, or will not be directly or indirectly related to the specificrecommendations or views contained in this research report.
OTHER DISCLOSURESThe information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accuracy or completeness. We do notundertake to advise the reader as to changes in figures or our views. This is not a solicitation of an order to buy or sell any securities.BB&T Capital Markets, a division of BB&T Securities, LLC, member FINRA/SIPC, is a wholly owned nonbank subsidiary of BB&T Corporation. The securities sold, offered orrecommended are not a deposit, not FDIC insured, not guaranteed by a bank, not guaranteed by any federal government agency and may go down in value.The opinions expressed are those of the analyst(s) and not those of BB&T Corporation or its executives.
Page 5 of 6
AUTOMOTIVE AFTERMARKET& DEALERSHIPS/VEHICLEDISCRETIONARY
Automotive Aftermarket & DealershipsBret D. Jordan, CFA (617) 316-1345 David L. Kelley (617) 316-1344
Powersports, RVs, & MarineDavid L. Kelley (617) 316-1344
COMMERCIAL AND INDUSTRIAL
Building Materials & ConstructionAdam R. Thalhimer, CFA (804) 344-8377 Basil M. Jones III (804) 782-8893 Teresa T. Nguyen, CFA (804) 782-8745
Building Products Paul Betz, CFA (804) 782-8746
Commercial DurablesMatthew S. McCall, CFA (804) 780-3582
Environmental ServicesCharles E. Redding (804) 782-8853 Payton Porter (804) 782-8820
Industrial DistributionCharles E. Redding (804) 782-8853 Payton Porter (804) 782-8820
Industrial Flow ControlKevin R. Maczka, CFA (804) 782-8811 Nicholas V. Prendergast (804) 782-2006
Industrial MachineryC. Schon Williams (804) 782-8769 John C. Duni, CPA (804) 482-7111
ENERGY
CoalMark A. Levin (804) 782-8856 Nathan P. Martin (804) 782-8799Garrett S. Nelson (804) 787-8259
Diversified MiningGarrett S. Nelson (804) 787-8259 Nathan P. Martin (804) 782-8799
FINANCIAL SERVICES
Banks/ThriftsBlair C. Brantley, CFA (804) 727-2604
Specialty FinanceVernon C. Plack, CFA (804) 780-3257 Peter W. Councill, CFA (804) 782-8850
FOOD AND AGRIBUSINESS
Agribusiness/Consumer FoodsBrett M. Hundley, CFA (804) 782-8753 Omar J. Mejias (804) 775-7939Heather L. Jones (804) 780-3280 Paul Betz, CFA (804) 782-8746
Food & Drug MerchandisingAndrew P. Wolf, CFA (617) 316-1322 Jeremy Henrard (617) 316-1321
RETAIL AND CONSUMER
Footwear, Apparel, & AccessoriesCorinnaL.Freedman (212) 822-8139
Softline RetailersPaul S. Alexander (617) 316-1323
Specialty/Hardlines RetailersAnthony C. Chukumba (212) 822-8143 Daniel J. Cannata (212) 822-8158
TRANSPORTATION SERVICES
Airfreight & Logistics/MaritimeKevin W. Sterling, CFA (804) 782-8804 William W. Horner (804) 787-1143 Chip Rowe (804) 782-8787
RailroadsMark A. Levin (804) 782-8856 Nathan P. Martin (804) 782-8799Garrett S. Nelson (804) 787-8259
Surface TransportationThomas S. Albrecht, CFA (804) 787-8210 Willard P. Milby IV (804) 775-7919 Aaron M. Reeves, CFA (804) 780-3237A. Rhem Wood Jr. (804) 782-8784
RESEARCH DEPARTMENT
Director of ResearchVernon C. Plack, CFA (804) 780-3257
Equity Product ManagerW. Moultrie Dotterer, CFA (804) 780-3279
Supervisory AnalystsKathleen R. Schneider (732) 567-8766Denise Boss Tyznar (804) 782-8880Peggy Myers Walz (804) 782-8785
RESEARCH OFFICESRichmondBostonNew York
Page 1Table Title: COMPANY STATISTICSINVESTMENT THESISTable Title: FINANCIALSOverviewCOMPANY DESCRIPTION
Page 2Valuation Methodology & Risk Considerations
Page 3Table Title: Consolidated Earnings Forecast
Page 4Table Title: Consolidated Earnings Forecast (CONT)
Page 5Graphics Title: Price ChartDisclosureTable Title: Report Key
Page 6Broker/Analyst Information