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Walter Energy's Loss Narrower than Expected

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Metallurgical coal producer Walter Energy Inc.’s operating loss per share of 55 cents in the second quarter of 2013 was narrower than the Zacks Consensus Estimate of a loss of 64 cents. In the year-ago quarter the company reported earnings of 43 cents.


Walter Energy’s total revenue of $441.5 million in the second quarter was down 34.8% from $677.6 million in the year-ago period.

The decline was primary due to lower met coal prices and a reduction in the sales volume compared to the prior-year period. In the quarter, met coal sales volume, including both hard coking coal (HCC) and low-volatility (low-vol) PCI, was 2.4 million metric tons (MMTs), down 14% from second-quarter 2012 levels.

The top-line results were 13.6% lower than the Zacks Consensus Estimate of $511 million.

Highlights of the Quarter

During the quarter, Walter Energy’s metallurgical coal production reached 2.9MMTs, increasing 9.2% from the year-ago quarter. The production consisted of 86% met coal and 14% pulverized coal injection (PCI) coal.

Total cash cost of sales per ton during the quarter was $122.04, down 9.7% from the year-ago level. This reflects a 5.7% decline in cash cost of sales per metric ton (MT) in the company's U.S. operations and a reduction of 10.4% per MT in its Canadian operations.

The company continues to benefit from its cost-cutting measures. Selling, general and administrative expenses were $27.1 million, down 24.3% from $35.8 million in the year-earlier quarter.

Interest expenses were $53.1 million versus $31.1 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. The available liquidity at the end of the quarter was $487.5 million, consisting of cash and cash equivalents of $170.9 million plus $316 million of availability under the company’s revolving credit facility. In addition, the company amended its credit facility in Jul 2013 to increase its financial flexibility.

Long-term debt as of Jun 30, 2013 was $2.59 billion versus $2.40 billion as of Dec 31, 2012.

In the second quarter, capital expenditure was $46 million, a 63% 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 further lowered its capital expenditure target by $20 million to $150 million for 2013.

Other Company Releases

Alpha Natural Resources Inc. is expected to release its second quarter earnings results on Aug 2, 2013. The Zacks Consensus Estimate is pegged at a pro forma loss of 60 cents per share.

Arch Coal Inc. reported second-quarter 2013 pro forma loss of 29 cents per share, narrower than the Zacks Consensus Estimate of a loss of 32 cents.

CONSOL Energy Inc. (CNX - Free Report) reported a loss of 3 cents per share for the second quarter of 2013, widely missing the Zacks Consensus Estimate of earnings of 18 cents.

Our View

Walter Energy is predominantly a metallurgical coal producer and the near-term prospects for met coal demand do not looking promising. However, met coal producers can take hope from the World Steel Association report, which predicts a 2.9% increase in steel use for 2013 and 3.2% for 2014.

Walter has taken significant steps to cut down its operational costs, but cutting down expenses will not lead to profitability unless the company can register an improvement in sales volume.

The demand for met coal will be primarily driven by the demand from Asian countries, like China, Japan and Korea. In Latin America, Brazil is expected to create demand for met coal due to its ongoing development work for the approaching World Cup and Olympics. Walter Energy has the capability but its ability to win contracts will be tested as other met coal operators will also look to grab the opportunity.

Birmingham, Ala. based Walter Energy was founded in 1946. It is one of the leading U.S. producers and exporters of premium met coal catering to the global steel industry. With a market capitalization of $0.7 billion, the company has 4,100 full time employees. The company currently has a Zacks Rank #4 (Sell).

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