It’s an unusual career arc that brings a CFO back to a company for a second go-round, especially when the two tenures are separated widely in time. Such is the case with W. Anderson “Andy” Bishop, who first served as finance chief of Hallador Petroleum from 1990 to 1993, then returned to the post in September.
But although the job is the same, the company has changed — dramatically. The first time Bishop was CFO, Hallador was an oil and gas exploration and production company. Today it is primarily a coal-mining enterprise. Although both natural resources are used to generate energy, some aspects of oil and coal operations are very different from one another, such as the way costs are allocated.
Bishop, however, never completely disassociated himself from Hallador. Following his first stint with the company, he became CFO and one-third owner of the SEC Institute, a private firm that provides training on Securities and Exchange Commission filing and reporting requirements. For the ensuing 16 years, under contract, he continued to help Hallador make its regulatory filings.
Hallador, which knows with a fair degree of precision that its revenue this year will be about $115 million, is traded — thinly — on the OTC Bulletin Board. The stock recently traded at $7.50, giving the company a market capitalization of $208 million. But Bishop has his eye on a jump to the Nasdaq Stock Market, so that company insiders, who own more than 90% of the stock, will have a better market in which to sell their shares. Following is an edited version of CFO‘s interview with Bishop.
What was behind the change in Hallador’s business?
We had an oil field in California, in Santa Barbara County. It was funny — when people heard that they always said, “Oh, it must be pretty there.” It wasn’t. The field was on the other side of the mountains in a desert-type area. Anyway, when oil prices started going up, people got interested in buying it. [The field was sold in October 2004, followed by most of Hallador's unproved oil and gas properties. The company still owns a 45% equity interest in Savoy Energy, an oil and gas company with operations in Michigan.]
“It is dumb to have to spend a lot of money [auditing internal controls]. The costs outweigh the benefits.” — Hallador Petroleum CFO Andy Bishop
Hallador’s majority shareholder, a private-equity firm called Yorktown, asked the company to poke around and check out the coal business, especially in the Illinois Basin, which is actually in Indiana. So it got involved in Sunrise Coal, which currently operates one underground mine. By July 2008, Hallador owned 80% of Sunrise, and this September we bought the remaining 20%.
How’s the business doing?
Last year coal prices shot up, and the company signed some long-term contracts with utilities at very good prices. We’re making good money. We plan to sell about 2.7 million tons of coal a year, and our average price is about $40 per ton. That makes about $110 million. [Hallador's net income was $14.4 million for the three quarters ended September 30, up from $6.3 million in the first nine months of 2008.]
What was involved, from operational and finance perspectives, in switching from an oil-production operation to a coal-mining operation?
Oil is hard to find, but once you find it, it’s very easy to produce. You don’t need many employees. You hook it up to pipelines and it goes. On the other hand, coal is easy to find, but it’s hard to produce. We have 300 employees producing coal and a $22 million payroll. It’s a very labor-intensive business. The issues that went with that — involving human resources, health benefits, workmen’s comp — were different for Hallador. The mine is basically a 24/7 operation. We’ve got three shifts running.
Did you know anything about the coal business before you rejoined Hallador?
Well, we still dabble some in oil and gas. But no — the Hallador management team in Denver, including me, is quickly catching up, but we were not all that familiar with the coal business. The team in Indiana is led by Brent Bisland, Sunrise’s president. But those guys aren’t familiar with being a public company, and [Hallador CEO Victor Stabio] and I are.
There is a separate CFO for Sunrise, Larry Martin. He’s a former auditor, like me, but he has mostly dealt with private companies. A private company doesn’t do [Management Discussion and Analysis sections of financial reports], it doesn’t disclose its salaries to the world like a public company does, and it doesn’t have onerous internal-controls audits. All of that is what we bring to the table in Denver.
Speaking of salaries, yours is $100,000, according to your filing. Is that low for the CFO of a $100 million company?
We’re big believers in restricted stock units and not a whole lot of cash. I’ve done OK in my career, and I don’t need the cash all that much. Pay us in stock. That gives us more incentive. We said in our September 8-K that we’re going to give a certain number of RSUs to management. [Bishop currently owns 58,500 shares of Hallador stock, according to public filings.]
With the coal business being so different from the oil business, did you know what you were getting into?
Oh yes. I left Hallador in 1993 and went into the seminar business, but I always officed with them, and I helped them on their SEC filings and worked with their auditors. I know the board members, and the CEO in 1993 is still the CEO now.
What I like about our board is that they’ve got skin in the game. One of our board members is Brian Lawrence, and his entity, Yorktown, controls 55% of the stock. Another board member controls 20%. Altogether more than 90% of the shares are closely held.
In the 8-K filed in September when the company purchased the remaining 20% of Sunrise, Hallador said it’s planning to move from the OTC Bulletin Board to the Nasdaq Stock Market. Why are you making that change, and as the CFO, what do you have to do to make it happen?
I have to make the application, which may be in December. And I’m responsible for getting the corporate governance lined up. We just brought on an outside board member as the chair of our audit committee and audit expert.
We have about 28 million shares outstanding. It’s thinly traded, but if 2,000 shares trade in a day the stock can go from $6 to $7, because there’s not much float. Being listed on the Nasdaq will give us more visibility in the marketplace so that some of our existing shareholders can sell some of their stock in the open market. Hopefully we’ll get the float to the 20% range.
After you get the Nasdaq listing set up, what’s your role going to be?
We’ll start doing quarterly analyst calls, and I’ll be getting those going. We’ll also be going to investor conferences to tell our story.
Are you looking to get into additional coal mines?
Yes. Right now we’re a one-mine company, and you can’t be just that. In that sense it’s like oil and gas. We have finite reserves, and as they deplete you have to find new reserves. We have 45 million tons of coal reserves, and we’re producing in the range of 3 million tons per year, so if we don’t replace that production with new reserves, in 15 years we’ll be out of business.
Where will this growth take place?
The big thing for Peabody, the world’s largest coal company, is surface mining in Wyoming, but their growth is taking place in Australia and other places outside the United States. We don’t plan to do that. Our expertise is the Illinois basin, and we’re going to stick with that. There are opportunities there. And what makes the Illinois basin nice is that there are many public utilities with coal-fired generating plants near the coal mines. So the cost of transportation is not that much, compared with taking coal by train from Wyoming to, say, North Carolina.
How do you feel about working for a coal company, considering global warming and all the environmental activism?
People asked me about that when we were in the oil business, too. I say, the oil business makes America work. How many jobs does it provide? With coal, people say it’s nasty and dirty, but you need something to provide the energy that you convert to electricity. In Europe and Japan there is nuclear energy, which is fine. But in the United States people are afraid of nuclear energy, so we burn coal. About half of the electricity generated in this country comes from coal [according to the American Coal Foundation].
But that doesn’t answer the question about its dirtiness.
It’s not dirty. The mine is not like those old pictures you used to see where the miners have soot all over their faces. I was surprised when I first went to the mine. The technology is such that black lung disease is a thing of the past.
When you burn coal, you do get CO2 emissions. The [Environmental Protection Agency] says CO2 is dangerous, even though trees breathe it and give off oxygen. I’m not concerned about global warming. I am concerned about the environment, though. All the stuff that used to come out of smokestacks was nasty. That’s why laws were passed that limited the burning of high-sulfur coal. That put the Indiana coal business out of business, because the coal there is high in sulfur. But then technology to scrub it out was developed. All of a sudden, Indiana coal became valuable again.
What are your capital needs and how are you filling them?
Right now we have a $40 million term loan and are starting to pay that off — $2.5 million this quarter. We also have a $30 million revolving credit line; at the moment, we’re not sure we need that much. Our mine is cash-flowing so well that we could pay the loan off in a couple of years. The question is, when we get another mine going, how will we finance it? We’ll probably do it with cash flow and bank debt. We could do a stock offering, but that dilutes the value of the existing shares. We are a liquid company; our debt to equity is manageable. We’re not going to mess that up.
Earlier you referred to internal-control audits as “onerous.” Your public float is way below the current $75 million threshold for having to get an external auditor’s attestation on internal controls. How will you feel if the SEC finally requires smaller companies to do that?
Our market cap is around $200 million, but our public float is around $10 million. It is dumb to have to spend a lot of money on that. We believe in internal controls, but we don’t believe having them audited is the answer; the costs outweigh the benefits. The numbers that the investment community cares about are in the financial statements. So you have an audit of those — I’m not saying we should do away with audits. But if the investors are so concerned about internal controls, let’s let them vote on it. If they say they want to spend the money, I’ll say fine, it’s their money. But don’t force it down our throats.
And what about an eventual switch to International Financial Reporting Standards?
I’m against it. I’m not aware of any analyst screaming for it, or any mutual fund saying “Man, I can’t make an investment decision; we have to go with IFRS.” Here too, make it optional, don’t force it. If you want to stick with the gold standard, the BMW, go with U.S. GAAP. If you want to downgrade to a Hyundai, go with IFRS. Then let the marketplace decide, not a bunch of bureaucrats.