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Walter Energy (WLT) Narrows Loss, Bankruptcy Fear Looms

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Metallurgical coal producer Walter Energy Inc. reported an operating loss of $1.08 per share in the first quarter of 2015, narrower than the Zacks Consensus Estimate of $1.42 per share and the year-ago loss of $1.47 per share.

Revenues

Walter Energy’s total revenues of $290.9 million in the first quarter lagged the Zacks Consensus Estimate of $320 million by 9.1%. Revenues in the quarter also plunged 29.7% year over year reflecting a decline in average selling prices and average volume sold for met coal.

Recent Developments

On Apr 15, 2015, the company elected to exercise the 30-day grace period under the terms of the indentures governing its 9.50% Senior Secured Notes due 2019 and its 8.50% Senior Notes due 2021 to extend the timeline for making the cash interest payments which were due on Apr 15, 2015. The aggregate amount of the interest payments is approximately $62.4 million.

During the 30-day grace period, the company is working with its debt holders to establish a capital structure that will position the company to weather a highly competitive and challenging market.  Walter Energy emphasized that this decision to take a grace period of 30 days does not reflect a current liquidity issue, as it had nearly $435 million of cash and investments as of Mar 31, 2015.

However, if Walter Energy fails to make the required interest payment on May 15, 2015, the default would be considered an Event of Default and all outstanding notes will become due and payable immediately without further action or notice.

Highlights of the First Quarter

During the quarter, Walter Energy’s metallurgical coal production plunged 36.9% year over year to 1.97 million metric tons (MMTs). Lower production was primarily due to the idling of mines.

Walter Energy’ metallurgical sales volume in the reported quarter also fell from the prior-year level. Total volumes sold were 2.3 MMTs, down 11.4% year over year.  The company also sold thermal coal, hard coking coal (HCC) and low-volatility pulverized coal injection product (PCI) – their sales volumes were 0.14 MMTs, 0.1MMTs and 0.2 MMT respectively.

Total costs and expenses in the reported quarter were $377.3 million, down 18.1% from the year-ago period.

In the U.S., average selling price of metallurgical coal per metric ton (MT) declined 16.5% year over year to $106.35 while average selling price of thermal coal improved by nearly 5% year over year to $65.23 per MT. The improvement in thermal coal did not have much of an impact as U.S. thermal coal volumes dropped nearly 57.3% year over year.

Interest expenses were $78.2 million compared with $65.4 million in the prior-year quarter.

Financial Update

Cash and cash equivalents as of Mar 31, 2015, were $434.7 million compared with $468.5 million as of Dec 31, 2014.

Net cash from/(used) in operating activities was ($12.9) million in the first quarter of 2015 compared with $35.4 million in the year-ago period.

Capital expenditure in first-quarter 2015 was $17.4 million, up 41.4% from $12.28 million in the year-ago quarter.

Other Coal Company Releases

CONSOL Energy Inc. (CNX - Free Report) reported pro forma earnings of 37 cents per share for the first quarter of 2015, beating the Zacks Consensus Estimate of 11 cents by 236.4%

Arch Coal Inc. reported a first-quarter 2015 adjusted loss of 54 cents per share, wider than the Zacks Consensus Estimate of a loss of 48 cents.

Peabody Energy (BTU - Free Report) reported a loss of 62 cents per share in first-quarter 2015, much wider than the Zacks Consensus Estimate of a loss of 33 cents, resulting in a negative surprise of 87.9%.

Our View

Though Walter Energy’s loss per share in the first quarter was narrower than expected, the ongoing softness in the global met coal markets continued to weigh on its performance.

Even though the company had said that it will make the necessary interest payment on May 15, 2015, the share price of the stock has been on a downtrend. Walter Energy has lost 30.6% since the Apr 15 announcement on fear of bankruptcy, closing at 49 cents yesterday.

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




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