Monday, July 28, 2014

More Thoughts on Walter Energy Cash Flows

This is very rough, lots of unknowns, but just some back of the envelope math:

$405 million: 3/31 cash balance
-$218 million: *cash* interest expense
-$130 million: management capex target for year
+$12 million: capex spent in Q1
+$25 million: sale of Blue Creek terminal
-$75 million: operational loss Q2-Q4 of 2014 based on cash cost 105 and met coal price 95 for 7.5mmt
$19 million projected cash balance YE 2014

My numbers may be off on the operational cash cost and met coal price. They could conceivably borrow more money (subject to leverage covenant on bank loans), slash capex more, sell more assets (tough market though), or maybe liquidate more inventory to raise cash.


Josh H said...

I had the opportunity to look at the numbers this weekend. I agree with your analysis and can see BK in early 2015. However, using a really optimistic scenario, I can see WLT lasting until 2016.

Here are the heroic assumptions

An inventory decline of $50MM and 100MM in asset sales, would offset 75MM in CapEx and 140MM in cash interest. I also assumed operating cash flow at breakeven.

It is much more likely in my opinion that they burn through about 150MM in cash in the next 6 months. That would take cash to 200MM without any changes in the revolver. Also depending on their worry about access to it, WLT may draw it down earlier, which will just increase the cash interest expense.

I put a small short on today but am looking at ANR and ACI to see if there is a better opportunity there. Otherwise, I will just watch and look to add to the short position when we see (or don't see) any announced asset sales.

CP said...

I agree about inventory liquidation. That's a source of cash that should be assumed under all scenarios.

Not sure about asset sales. It's a buyer's market for unprofitable coal mines, that's for sure.

Josh H said...

The only asset sale scheduled is the 25MM you already included. Mgmt guided to 250MM in asset sales and my 'heroic' assumption was 100MM. I don't see how they even get to 100 but wanted to model it in in case I am wrong.

I looked at ANR and ACI and I believe they have more time to run out the clock vs WLT. I added to my short today and was happy to see the price increase.

Josh H said...

I am curious how you are trading this. Are you long the senior bonds and short the stock?

I want to lock in the borrow rate now (via options) as I expect the short rate to go higher over time as more and more sophisticated investors put on this trade.

As for me, I started selling some calls and using the proceeds to buy puts. I placed some trades on for Jan15 (even though I expect it is too early for BK stock could trade to 1 or 2) and a bigger portion for Jan16.

CP said...

The other question, how much cash do you need to run a coal company? I'm thinking $100-$200mm. More than zero.

CP said...

I agree with Imperial that all the bonds are overpriced, but the equity is the most overpriced piece of the capital structure.

I could see $100mm market cap being not completely outrageous *right now*, which would be $1.60 share price.

Josh H said...

Good point on working capital, obviously need some cash laying around that I foolishly forgot to account for. I'm shifting the odds to more clearly favor an early 2015 bk filing (along with below).

Re-read the WLT 10-K this morning basically trying to figure out what non-core assets they can sell.

My conclusion is that even my 100MM heroic assumption is still too high (vs the company's target of 250MM).

I'm going to add to my short on Monday, please gap higher!