Walter Energy: Turning Around or Falling Down?

Jianyu Zhao |

Walter Energy, metallurgical, coal productionOn June 26 shares of Walter Energy (WLT) , a metallurgical coal producer, declined 1.45 percent to hit $5.43 per share. The stock reached its 52-week high of $19.50 in November 2013 and recently hit its 52-week low of $4.25 at the start of June 2014. The question is, can the company save itself from the descending trend?

Walter Energy used to be a rocketing stock. On April 8, 2011, it touched $141.00 per share. Since then, the company has seemed like a chicken with its head cut off. The price of coal fell by approximately 64 percent from $330.00 to $120.00 per metric ton, and it was a complete disaster for Walter Energy.

Full of Troubles: The Bear’s Case

Walter Energy released its financial results in Q1 of fiscal 2014, demonstrating a net loss of $92.20 million, compared with the one-year-earlier loss of $49.40 million. The company has been suffering from the load of high debt. In addition to the great losses, the company’s gross profit margin is currently as extremely low as 12.11%. The high debt-to-ratio of 4.38 implies increasing risks, which is associated with the management of debt levels within the company. And there’re other disappointing factors suggesting the company’s future won’t be too sunny.

Mining is never an easy business. Myriad reasons have caused the coal market to become weak, including excess met coal supply from Australian producers, slower Chinese met coal imports, weak economic conditions in Europe, and fierce competitions from natural gas companies. As the whole industry is having a difficult time, it’s not very surprising that Walter Energy could not make any difference.

According to the Energy Information Administration, during 2013, U.S. coal exports decreased 6.36 percent, from 125.7 to 117.7 million short tons, driven by lower electric power sector demand, to roughly 1.02 billion short tons. Because met coal is used in the process of making steel that directly relates to construction, the worldwide demands, especially from Asian countries like China, support the company. Given that the step of urbanization in China has slowed, the demands of met coal imports has tapered off.

As for Walter Energy, the current low prices of met coal and limited growth of the production will keep dragging down the company’s revenues. According to the company’s financial reports, met coal sales in Q1 2014 were 2.6 million metric tons (MMTs), representing a decrease of 0.2 MMTs compared with one year earlier. The average selling price for hard coking coal (HCC) was $127.43 per metric ton (MT), down from $154.34 per MT in Q1 of fiscal 2013. In the meantime, the selling price for low-volatility pulverized coal injection product has a year-over-year decrease of 15.78 percent from 139.23 per MT to $117.26 per MT.

There’re Still Chances To Rebound: The Bull’s Case

In spite of the above troubles Walter Energy have, there’s chances for it to rebound. Two major factors demonstrate that the company still makes efforts to save itself. One is that the company has made a series of cost-cutting actions, and the other good news is that Walter Energy has felt little impact from the Environmental Protection Agency’s (EPA) new rules.

Walter Energy began to take several concrete steps to improve its cost profile from April 2014. The company announced that it would idle its Canadian operations, including the Wolverine and Brazion coal mines in British Columbia. The former was effective soon after the announcement, while Brazion would continue to operate but expected to idle as well by July 2014. The move would cause employment changes, including temporary layoffs of approximately 695 employees in total. It’s estimated that with the idling of the mines, the company may “incur severance charges of approximately $7 million in the second quarter of 2014.”

“These coal reserves remain valuable assets,” said CEO Walter J. Scheller III, “However, given the current met coal pricing environment, our best course of action at this time is to idle these operations until we can achieve reasonable value from these reserves.”

To squeeze every penny it could, Walter Energy also decided on delist from the Toronto Stock Exchange (TSX) at the end of April. The decision was primarily based on the low trading volume of its share on the TSX over a long period, no longer justifying the financial and administrative costs associated with maintaining a dual listing.

In addition, Walter Energy announced in May 2014 that the company reached an agreement in principle with the Alabama State Port Authority to sell both the Blue Creek Terminal and an additional parcel of more than 60 acres located less than a mile from the Blue Creek Terminal. The total price the Port Authority would pay for the properties would be $250million, which would relieve, more or less, the company from its high debts.

Impacts from the changes of government polices cannot be neglected as well. EPA proposed a commonsense plan to reduce carbon emission from power plants on June 2, 2014. Many investors assumed that major in coal and mines would be greatly affected. However, Walter Energy avoided being impacted by the new ruling, as it obtains approximately 95 percent of revenues from the export of metallurgical coal, according to the company’s press release.

“Because the rules issued today by EPA are aimed at controlling carbon dioxide emissions from existing domestic power plants, we do not expect the regulation will have any material impact on Walter Energy. We primarily mine and sell metallurgical grades of coal that are used in making steel, not generating electricity.”

Walter Energy has not met the worst scenario yet, though problems remain. The company’s efforts for self-rescue may work in the long run, but Walter Energy needs to hurry up.

 

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