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Metallurgical coal producer Walter Energy Inc.’s (WLT - Analyst Report) operating loss of $1.97 per share in the second quarter of 2014 was wider than the Zacks Consensus Estimate of a loss of $1.76. In the year-ago quarter the company reported a loss of 55 cents.
 

 

On a GAAP basis, quarterly loss was $2.33 per share compared with a loss of 55 cents per share a year ago.

The wider-than-expected loss also had a negative impact on Walter Energy’s traded price with shares shedding 2.21% yesterday and finally closing at $5.75 per share.

Revenue

Walter Energy’s total revenue of $378.4 million in the second quarter was down 14.3% from $441.5 million in the year-ago period. The decline was primary due to lower met coal prices, partially offset by an increase in coal sales volume.

The top line was lower than the Zacks Consensus Estimate of $396 million by 4.4%.

Highlights of the Quarter

During the quarter, Walter Energy’s metallurgical coal production reached 2.4 million metric tons (MMTs), decreasing 17.2% from the year-ago quarter. The lower production was primarily due to the idling of mines in Canada.

Walter Energy nonetheless registered an increase in its sales volume in the reported quarter. Total volumes sold were 2.7 MMTs, up 12.5% year over year. Out of the total sales volume, hard coking coal (HCC) and low-volatility pulverized coal injection product (PCI) were 2.3 MMTs and 0.4MMT respectively.

Total cash cost of met coal sales per metric ton (MT) during the quarter was $99.70, down 18.3% year over year. The company succeeded in lowering expenses primarily due to a continuous improvement in mining costs.

However, the company had to digest a nearly 25.5% year-over-year decline in the selling price of HCC to $114.43 per MT and a 19.3% decline in the selling price of low-vol PCI to $109.37 per MT.

Selling, general and administrative expenses were $19.0 million, down 29.9% from $27.1 million in the year-earlier quarter.

Interest expenses were $73.4 million versus $53.0 million in the prior-year quarter. The increase in expenses was primarily due to the issue of new debts.

Financial Update

The company continues to maintain a healthy cash balance. Available liquidity at the end of the quarter was $563.9 million, consisting of cash and cash equivalents of $293.5 million plus $270.4 million of availability under the company’s revolving credit facility.

Long-term debt as of Jun 30, 2014 totaled $2.88 billion, higher than $2.77 billion at 2013 end.

In the second quarter, capital expenditure was $31.2 million, a nearly 32.5% decline from the year-ago quarter. The decline in capital expenditure reflects Walter Energy’s capital discipline in the face of a worldwide decline in met coal demand.

Walter Energy is on track to make capital expenditure of $120 million in 2014.

Guidance

Walter Energy expects to produce 9.0–10.0 MMTs of coal in 2014. The company lowered its met coal sales volume guidance to a range of 9.5–10.5 MMTs from the prior expectation of 10.5–$11.5 MMTs. The lowered sales volume forecast was primarily due to Walter Energy’s principal coal transportation provider at the Brule mine in Canada discontinuing operations effective Jun 1.

Other Coal Company Releases

Arch Coal Inc. (ACI - Analyst Report) reported second-quarter 2014 adjusted loss of 46 cents per share, narrower than the Zacks Consensus Estimate of a loss of 48 cents.

Peabody Energy Corporation (BTU - Analyst Report) reported a loss per share of 28 cents in the second quarter 2014, marginally wider than the Zacks Consensus Estimate of a loss of 27 cents.

CONSOL Energy, Inc. (CNX - Analyst Report) reported pro forma earnings of 7 cents per share for the second quarter of 2014, lagging the Zacks Consensus Estimate of 25 cents by 72%.

Our View

The performance of Walter Energy in the reported quarter was lower than expected. Softness in the sales price per ton practically ate away the benefits of a higher sales volume.

Walter Energy has been taking a number of measures to counter the overall softness in demand. To that end, it has idled its Wolverine and Brazion mining operations in British Columbia in the reported quarter. In addition, the refinancing of debt through share issues will lower the annual interest burden of the company.

A World Steel Association report estimates global steel usage to improve by 3.1% year over year in 2014. Walter Energy’s high quality met coal reserves can exploit any revival in the met coal market. However, the current supply glut in the coal markets is resulting in a demand-supply imbalance and putting pressure on sales prices.

Walter Energy currently holds a Zacks Rank #4 (Sell).
 

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