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
REASON TO BUY
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
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.
Walter Energy Inc. (WLT): Read the Full Research
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