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

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Summary:
Walter Energy Inc. posted a wider-than-expected loss in the first quarter of 2014 due to soft coal market conditions in the U.S. The company underperformed primarily due to downward pressure in thermal as well as met coal prices. We believe Walter Energy's cost-control initiatives and systematic idling of uneconomic mine operations in Canada will lead to stable margins in the upcoming quarters. In addition, the oversupply in the global met coal market will gradually disappear in the long term as bullish steel demand overseas will drive met coal exports. However, stiff competition from prime coal exporters like Australia and Indonesia as well as failure to renew customer contracts could act as growth deterrents.

Overview:

Tampa, Fla.-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, Ala. 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 11.5 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 include 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

REASON TO BUY

Walter Energy remains well-positioned with its strong met coal portfolio. Currently, the company continues to focus mainly on its two deep underground mines 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. In the first quarter of 2014, hard coking coal output from the U.S. rose 18.8% year over year to 2.1 million metric tons thanks to the company's premier Alabama mines.

Globally, demand for met coal is expected to rise primarily on the back of higher electricity production in Asian countries, mainly in India, China, Japan and South Korea. As per the World Steel Association, met coal demand will likely improve by 3.1% in 2014. These markets are likely to drive steel demand led by the rising automotive, shipbuilding and construction sectors. In Brazil, steel demand is estimated to grow by 3% in the next few years as steel giant Arcelor has restarted a plant which is expected to reach full capacity over a span of 6 years. Although Europe is currently plagued with political and economic uncertainties, steel markets in Germany, Italy and U.K. experienced healthy growths in the first quarter, reflecting a good start in these regions. Steel consumption in Europe will likely increase by 2% in 2014 as per the World Steel Association. With recoverable coal reserves and positional advantage in West Virginia, Alabama and the U.K., Walter Energy's thermal coal order book is expected to improve in the future.

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 23% year over year in first-quarter 2014 while the cash cost sales per ton for met coal improved 10% compared to the year-ago period. Apart from curtailing production cost, Walter Energy also reduced its selling, general and administrative expenses significantly by 32.6% from the year-ago comparable 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. The combination of cost-efficiency and controlled production will lead to stable margins.

Walter Energy effectively maintains a disciplined balance sheet along with a flexible liquidity portfolio. The company's available liquidity as of Mar 31, 2014 was $676 million, up by over $100 million from the year-ago figure. In addition, cash and cash equivalents of $405 million at the end of Mar 31, 2014 increased more than 55.2% from year-end 2013 primarily due to improvement in cash flow from operating activities. Walter Energy also has $271 million under its revolving credit facility. A strong financial position will allow the company to effectively finance its targeted ventures and refinance its debts. The company currently has no significant debt maturities till Apr 2018.


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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 The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: TRI , PCI , WLT

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