Summary
- Hallador Energy Company is up far more than triple its 52-week low.
- Hallador Energy fundamentals continue to improve as coal prices remain strong.
- Management expects EBITDA to triple in the next 13 months, resulting in Hallador Energy Company being able to pay down all debt.
- I was going to buy Hallador stock in the first couple of months of 2022; I should have known coal prices were going to soar in the current economic and energy environment.
In early 2022, I was looking closely at the coal sector, specifically for the purpose of seeing whether or not there was a company that was trading at a low price, knowing that if I found it, it would be able to leverage the price of coal nicely for solid gains.
I found it in Hallador Energy Company ( HNRG ), which at the time was trading a little above the $2.00 per share mark, eventually jumping to a 52-week high of $7.95 before pulling back to about $7.50 as I write.
In this article, I want to primarily talk about the outlook given by management concerning the next year, and what to consider if thinking about taking a position in the company in the near future.
Some of Hallador's numbers
Even though some of the numbers for Hallador have been modest recently, the company's share price has been rewarded because of the future outlook for the coal industry over the next several years; we'll get into that a little later in the article.
In the last reporting period , HNRG reported a net loss of $3.4 million or $0.11 per share. For the first half it was slightly higher, with a net loss of $3.5 million or $0.44 per share. Adjusted EBITDA in the quarter was $11.5 million, totaling $14.1 million in the first half.
Debt at the end of the quarter was up $10.7 million, increasing to $19 million for the calendar year. Bank debt at the end of June 30 was $130.7 million, with net debt of $121.9 million.
Production cost in the quarter dropped by $7.71 per ton to $31.83 per ton sequentially. That was attributed primarily to increased productivity.
To improve liquidity, which stood at $9 million in the reporting period, the company issued $10 million of convertible notes, along with another $19 million of convertible notes in the third quarter, which also bolsters the company's financial strength. Of the $29 million the company converted $10 million of that to equity in Q2.
CEO Brent Bilsland said the recent for the capital raise was to ensure the company had "enough liquidity to get to our high-priced contracts," and to protect against any surprises that may have come from closing its acquisition of the Merom plant, which it recently closed on. In Q2, HNRG shipped 1.6 million tons at average sales of $40.32, which was down $1.17 per ton from Q1. Management said it should be the lowest sales price quarter for the next several years. For the last two quarters of 2022, the company estimates sales prices will increase by $8 per ton, with expectations prices per ton next year will be much higher than that.
Compelling coal price and EBITDA projections
The most important revelation to come out of the earnings report was the announcement the company had contracted 2.2 million tons of forward sales at a price surpassing $125 per ton. Those contracts will run from 2022 through 2025, significantly increasing the average sales price during that period of time. Next year, for example, management looks for the average sales price per ton to come in at $58 per ton. To provide context, historical EBITDA was approximately $50 million. Next year, the company estimates EBITDA will reach over three times that amount at $160 million.
Expectations are that will produce enough cash flow to pay off all debt within about a year or so. At the August earnings report, the company said it would take about 19 months to do so. That means debt should be paid off somewhere around September 2023.
How to play the company now
All of this is definitely compelling, but the question that needs to be asked after bouncing from its 52-week low of $2.06 in mid-December 2021 to almost $8.00 per share in the latter part of August 2023, before tapering off some is whether or not next year's numbers are already priced into the stock.
The stock has seen a double bottom of about $5.00 per share in early July and October, getting a nice bounce after each bottom. While there's obviously no way of knowing what is going to happen going forward, I lean toward another drop in its share price before it takes off once again.
Since the market has had plenty of time to absorb the price projection for 2023 and beyond, I'm not sure there will be a lot more upside in the near term unless geopolitical events result in demand that drives more buyers to lot in supply at higher prices. Under that scenario, we would probably see HNRG test the $10.00 per share mark, and possibly a little higher, depending on the amount of tons being locked in. The other question is how much supply the company would have to meet that demand, if it ends up playing out that way.
But as the company stands, I think there is likely to be a pullback in the near term, albeit tempered by possible increase in the price of coal during the colder winter season.
There has also been a triple top with the share price of HNRG since the latter part of June 2023, topping out in a range of about $7.40 to about $7.60, so it remains to be seen if it can blow past that mark and pushes up higher, or it fails to break past that level and starts another temporary share price correction.
Taking into account the time of year, recent boost in share price, the double bottom and triple top, the share price of the company could go either way in the near term.
For that reason dollar-cost averaging and position sizing would be the safest way to take a position in HNRG. It won't get you the lowest entry point, but is should provide a good cost basis heading into 2023, which should result in a nice upward move in the share price if earnings report confirm managements' outlook.
Do take note that this is a thinly traded stock, so there could be short-term issues concerning liquidity if something unforeseen happens and investors in large numbers attempt to buy or sell very quickly.
Conclusion
Over the next several years, HNRG promises to be a profitable holding for investors. While I don't think the next twelve months will bring the 3x gains of the last year or so, I do believe once EBITDA is confirmed and cash flow soars, investors will pile into the company in larger numbers than we're seeing now.
If management remains disciplined and does pay down debt, it'll be positioned for being more flexible with it once debt is paid off. That will provide it with the flexibility to use its cash in various ways to benefit shareholders and the company, such as buying back shares and investing in other businesses, among other possibilities.
Concerning the completion of the recent acquisition of Merom, management stated it had little expectation of the company generating much profit from it in the near term, unless it secures more tons for the plant. Under that scenario, cash flow could jump past the estimated $160 million projected for 2023. The company said it's working on securing those additional tons. If that works out, the upside for HNRG could be substantially more than the positive outlook I've laid out in this article, depending on the amount of additional tonnage the company would be able to secure.
However that turns out, HNRG looks like a solid holding for 2023, even if investors have to get in at a higher price than they could have.
For further details see:
Hallador Energy: I Still Kick Myself For Not Buying