Walter Energy Inc. (WLT): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Walter Energy Inc.'s operating loss of $1.58 per share in the third quarter of 2014 was narrower than the Zacks Consensus Estimate and the year-ago loss of $1.63 per share. Walter Energy has been taking a number of measures to counter the overall softness in coal demand. In the reported quarter, Walter Energy completed the previously announced divesture of its Blue Creek Terminal and associated properties for $25 million. Given the challenging global met coal market, this pure-play met coal company is doing its part to cope with the times through production cuts and cost savings. Walter Energy's high quality met coal reserves can exploit any revival in the market. However, the current supply glut in the coal markets is resulting in a demand-supply imbalance and putting pressure on sales prices. Hence, we maintain our Neutral recommendation on the stock.


Tampa, FL.-based Walter Energy Inc. is one of the leading U.S. producers and exporters of premium metallurgical (met) coal to the global steel industry. The company also has a steam/industrial coal mining business, although much smaller in size than its metallurgical operations. It also produces metallurgical coke and coal bed methane gas. It owns a Birmingham, AL based manufacturing unit of coke and coke byproducts. Its de-gassing division, also headquartered in Alabama, extracts coal bed methane gas (natural gas) through an equally-owned joint venture with the exploration and production subsidiary of El Paso Corp. (EP). In 2013, the company's revenue was roughly $1.8 billion and it employed nearly 3,600 in the United States, Canada and United Kingdom.

Walter produces metallurgical coal through its subsidiary Jim Walter Resources (JWR) consisting of Jim Walter Resources mines No.4 and No.7 steam coal and industrial coal through its Walter Minerals subsidiary Tuscaloosa Resources (TRI) and Taft Coal & Sales (Taft) and metallurgical coke through its Walter Coke subsidiary (formerly Sloss). It is also a significant producer of natural gas. In 2013, met coal production totaled 11.6 million metric tons, of which 84% was hard coking coal and the balance low-volatile Pulverized Coal Injection (PCI) coal. In addition, the company's natural gas business produced 12.1 billion cubic feet of gas in 2013. Walter Energy possessed 386.3 million metric tons of total recoverable coal reserves at the end of 2013.

Currently, the company reports in three operating segments the U.S. Operations segment, the Canadian and U.K. Operations segment and the "Other" segment. Both the U.S. Operations and Canadian and U.K. Operations reportable segments' primary business is that of mining and export of hard coking coal for the steel industry.

The U.S. Operations segment comprises Walter's historical Underground Mining, Surface Mining and Walter Coke operating segments, along with the West Virginia mining operations (part of the Western Coal acquisition) and the North River Mine.

The Canadian and U.K. Operations segment includes mining operations in northeast British Columbia (Canada) and in South Wales (United Kingdom), both of which came into its ambit through the Western acquisition.

The Other segment primarily consists of corporate activities and expenditures.

Source: Company


Walter Energy remains well-positioned with its strong met coal portfolio. The company continues to focus mainly on its two deep underground mines in Alabama Mine No. 4 and Mine No. 7. With long wall operations already completed at Mine 4, Walter Energy's met coal production prospects look stable which will enable the company to meet increasing future coal demand. The aforementioned mines produce high quality metallurgical coal, which contains very low sulfur and is ideal for steel making.

Globally, demand for met coal is expected to rise primarily on the back of higher steel production in Asian countries, mainly in India, China, Japan and South Korea. Per the latest data available from the World Steel Association, global steel production increased 2.1% to 1,231 metric tons (Mt) in the first 9 months of 2014. . As per the association, met coal demand will likely improve 2.0% in 2014 which will be followed by another 2% improvement in 2015.The demand for steel is likely to be led by the rising automotive, shipbuilding and construction sectors. Besides the Asian countries steel production is seen to be improving in other regions as well.

In the U.S. steel demand is estimated to jump 6.7% in 2014 supported by strong growth in the automotive and energy sectors. Per the World Steel Association, steel demand outlook in the European Union, bolstered by its recent stimulus measures, has improved by 4% to 145.9 Mt after increasing 0.8% in 2013. The improvement in steel production globally is expected to benefit coal exporters like Walter Energy.

We appreciate Walter Energy's "Controlling the Controllable" effort in tackling the soft coal market conditions in the U.S. The company continues to achieve success in its cost-containment efforts with production cost per ton declining 14% year over year in third-quarter 2014. Apart from curtailing production cost, Walter Energy also reduced its selling, general and administrative expenses significantly by 29.3% in the first nine months of 2014 compared with the year ago period. In addition, Walter Energy is systematically idling production operations in the Canadian mines which are uneconomical given the current low coal price environment in the domestic market.

Walter Energy sold its non-core asset, Blue Creek Coal Terminal, for $25 million to Alabama State Port Authority. The combination of cost-efficiency, controlled production and shedding of non-core assets will help the company to overcome the difficult times.

Walter Energy maintains a disciplined balance sheet along with a flexible liquidity portfolio. The company's available liquidity as of Sep 30, 2014 was nearly $623.9 million, consisting of cash and cash equivalents of $614.6 million plus $9.3 million of availability under the company's revolving credit facility. A strong financial position will allow the company to effectively finance its targeted ventures.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: TRI , PCI , WLT

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