Description

Conttura Energy ("CNTE") is a carve out of the best assets from Alpha Natural Resources Bankruptcy.  CNTE was created to provide a means for first lein creditors to obtain as  much value as possible from ANR's insolvency by creating a new entity with assets that could still be profitable in  very challenging coal markets.  CNTE CNTE produces thermological and metallurcical coal and has a 41% interest in the Dominion termainal in New Port News Verginia.  The short version of this story is that CNTE will likely produce 360-400MM of EBITDA this year and it has an EV of $870MM.  In otherwords, it is trading at 2.2X to 2.4X EBITDA for 2017. We think normalized EBITRDA isp propbably about $280MM which means it trades at about 3.1MM. That translates into a 30%+ FCF for 2017 and a 15% normalized FCF. 

They just provided a preview of Q4 and stated that EBITDA for the quarter was $85-$110 MM (compared to FBR (the only anlayst covering) at $55MM) and they generated $5 per share of free cash flow. http://conturaenergy.com/news/contura-announces-marketing-of-term-loan-facility/

Here is a quick summary of there assets:

CAPP (Central Appalachia):

• Mines metallurgical coal in VA & WV
• 150 mm tons reserves
• 2017 production guidance 3.5-4.3 mm tons
• Cost $63-68 / ton
• 30%  production priced at $101.13 / ton

NAPP (Northern Appalachia):

• 1 active thermal coal mine in PA
• 621 mm tons reserves
• 2017 production guidance 7.6-8.2 mm tons
• Cost $28-32 / ton 100% production priced at $42.31 / ton

PRB (Powder River Basin):

• Low cost thermal mines in WY
• 640 mm tons reserves
• 2017 production guidance 29-34 mm tons
• Cost $9.5-10.50 / ton
• 94% production priced at $11.05

So why is this so cheap?

•       No SEC financials: CNTE is not currently an SEC filer, so despite the company’s extremely low valuation, they do not show up in simple value screens on platforms like Capital IQ. Investors must use company disclosures, bankruptcy documents, and government data to track performance.

•       Limited financial history: Because CNTE is technically a new entity that purchased assets from Alpha Natural Resources during bankruptcy, financial disclosures from CNTE are only available for these assets from 7/26/2016 forward

•       Liquidity: Despite an enterprise value approaching $1 billion, CNTE trades over the counter.

•       Analyst Coverage: Only one analyst (FBR) covers the name. Prior to bankruptcy, more than a dozen analysts covered Alpha Natural Resources, and 6 currently cover Arch Coal (ARCH).

But it will probably not stay cheap for long:

Full Q4 2016 Results

•       Should hold first earnings call in early March.

•       Initial results indicated exceptional performance with adjusted EBITDA of $85-110mm vs. analyst estimate of $53mm

Debt Refinancing

•       CNTE seeking $400mm loan facility to replace existing debt.

•       ARCH had recent success refinancing. At similar rates, would save CNTE $10mm+ annually

SEC Registration / Uplisting

•       CNTE is currently working to register with SEC, which we expect to be completed sometime this Summer.

•       We expect CNTE to uplist to a major exchange concurrently with SEC registration

Additional Sellside Coverage

•       ARCH which emerged from BK after CNTE but has SEC registration and NYSE listing, is covered by 6 on sellside.

•       We expect most analysts to pick up coverage on CNTE shortly after the company uplists.

So once all these things happen what is the potential upside?

US Thermal comps are trading at 6.3X EBITDA which implys a 112% upside from the current price. ARCH coal trades at 4X its 2017 Multiople which impies )+80% upside and the old (highly levered with lower quality average assets) ANR traded with an average multiple of 5.8X which would imply a 95% upside to the normalized EBITDA for CNTE.

There are risks though…

China Steel Production

China is the world’s largest producer of steel which drives met coal prices.  A Chinese slow down would pressure met coal. 

China Coal Policy

Last year, met coal prices were volatile after the NDRC reduced coal mining days to 276 from 330, before reversing this policy.

Natural Gas Prices

If natural gas prices fell significantly this would result in coal to gas switching that could pressure thermal coal prices.

Long Term Decline of Coal

Long term, regulation & cost competition from renewables will lead to continuing secular decline in the use of thermal coal as a fuel.

Risk Mitigation

We have shorted more expensive coal companies subject to the same risks. CNTE’s massive discount to intrinsic value provides a margin of safety.

Catalyst

Full Q4 2016 Results

•       Should hold first earnings call in early March.

•       Initial results indicated exceptional performance with adjusted EBITDA of $85-110mm vs. analyst estimate of $53mm

Debt Refinancing

•       CNTE seeking $400mm loan facility to replace existing debt.

•       ARCH had recent success refinancing. At similar rates, would save CNTE $10mm+ annually

SEC Registration / Uplisting

•       CNTE is currently working to register with SEC, which we expect to be completed sometime this Summer.

•       We expect CNTE to uplist to a major exchange concurrently with SEC registration

Additional Sellside Coverage

•       ARCH which emerged from BK after CNTE but has SEC registration and NYSE listing, is covered by 6 on sellside.

•       We expect most analysts to pick up coverage on CNTE shortly after the company uplists.