|A coal miner carries supplies into a Pennsylvania coal mine in 2018.
Source: S&P Global Market Intelligence
U.S. coal companies that salvaged unwanted assets left by a wave of bankruptcy that swept over the sector in 2015 and 2016 are now seeking the aid of the bankruptcy court themselves.
The 10 largest U.S. coal producers mined nearly three-quarters of the coal produced in the U.S. in 2018, and six of those have either completed a bankruptcy restructuring or formed from the assets of a court-supervised restructuring in the last few years. Now, smaller companies that picked up distressed assets — often at relatively low prices or in exchange for taking on unwanted liabilities — are reporting those deals may not have been as attractive or well-timed as they had hoped.
Blackhawk Mining LLC, the latest U.S. coal company to file for bankruptcy, controls one of the largest collections of proven and probable reserves of metallurgical coal in the U.S. The company built its asset base from a series of acquisitions from distressed coal operators.
While the company generated about $165 million of EBITDA in 2018, that figure is overshadowed by $1.09 billion in debt. Part of the problem is years of underinvestment from distressed predecessors forcing Blackhawk to undertake a recapitalization effort to repair aged equipment and infrastructure, Blackhawk CFO Jesse Parrish explained in a July 19 court filing. Further, while the company's free cash flow per ton of coal sold has quadrupled since 2016, the metallurgical coal market did not improve until late 2016 after a long period of depressed pricing forced the company to close and idle several of its mines.
Blackhawk plans to emerge from bankruptcy reorganization without disrupting operations. However, several other buyers of distressed coal assets are heading toward a bankruptcy selloff of their own rather than a simple debt restructuring.
Former Blackjewel LLC CEO Jeff Hoops, whose resignation was a requirement of the company's interim restructuring financing package, noted in court filings that his company's assets were primarily acquired from struggling coal mining companies he "then revitalized." Blackjewel's mines included large thermal coal operations acquired by Contura Energy Inc., a company spun of Alpha Natural Resources Inc.'s bankruptcy, as well as eastern U.S. coal assets acquired from the recently reorganized Arch Coal Inc.
"The entire industry either has gone through, or is currently going through, a period of financial distress and reorganization," Hoops wrote in a July 1 court filing.
Contura paid Blackjewel $21.4 million in cash to take the company's two Powder River Basin mines. In exchange, Blackjewel assumed $119.7 million of asset retirement obligations. Earlier this month, Hoops told the bankruptcy court that the cash flow at Blackjewel has been "very tight" since the acquisition and even earlier in 2013 when his primary coal mining business was focused on Appalachia and went by the name Revelation Energy LLC.
Blackjewel is seeking the funding needed to get through an expedited sales process.
Metallurgical coal producer Mission Coal Co. LLC was formed in early 2018 by consolidating distressed asset acquired in 2015 and 2016. In some cases, the company paid no consideration other than assuming the liabilities associated with the assets.
The company was forced to file for a bankruptcy court restructuring only months later. Murray Energy Corp. bought the top metallurgical coal mines from the company and added them to its portfolio of mostly thermal coal mines, including mines Murray Energy bought during the bankruptcy reorganization of Armstrong Energy Inc. Murray Energy is one of the few large coal companies to avoid filing for bankruptcy, though the company did complete a distressed debt exchange in 2018 deemed a limited default by S&P Global Ratings.
Cambrian Coal Corp., another coal company to recently file for bankruptcy, blamed a "significant downturn in the market" that hampered efforts to raise liquidity even though a recent acquisition effectively doubled its footprint. The company reported missing production targets due to a lack of capital.
In 2015, Cambrian acquired three coal complexes from TECO Energy Inc. The acquisition required Cambrian to take on cash collateralized bonding obligations of more than $40.0 million for workers' compensation and black lung liabilities that had previously been self-insured and obligated the company to pay TECO $60.0 million for the coal assets. That $60.0 million contingency payment was later reduced by agreement to $19 million. According to bankruptcy filings, the full amount is outstanding after Cambrian missed its first $3 million payment on the total in March.
Cambrian ran into a common conundrum facing the owners of distressed mines: closed mining operations continue to generate losses due to ongoing reclamation and other maintenance costs. Now the company, which has recorded net losses each year since 2015, is also starting an "expeditious sale and marketing process for substantially all of the debtors' assets."
Those sales could catch the eye of a few companies that intentionally sought out distressed coal assets but avoided bankruptcy. For example, American Resources Corp. and Royal Energy Resources Inc. have set about on a strategy of acquiring distressed coal assets on the cheap.
American Resources issued a news release July 22 announcing 32% growth in revenues thanks to a strategic growth plan built around scooping up metallurgical coal assets throughout the Central Appalachia Basin. Now, the company is eyeing new metallurgical coal expansion opportunities among today's distressed and stranded assets.
"With the support of our various industry partners, we are excited about the possibility to selectively acquire attractive assets and operations, continue to employ the dedicated men and women at these operations, and continue being a good steward of the environment," American Resources Chairman and CEO Mark Jensen said in a news release.