What Is Happening To The Coal Industry?
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The last two days were brutal for coal stocks, as Patriot Coal Corp announced its bankruptcy filing and James River Coal (NASDAQ: JRCC) plunged 25%, hinting at a possible bankruptcy filing itself. The sell-off ensued for the rest of the coal players, such as Walter Energy (NYSE: WLT), Alpha Natural Resources (NYSE: ANR), Peabody Energy Corp (NYSE: BTU), and Arch Coal (NYSE: ACI) Seeing such a quick sell-off from these well known, mid-cap names, which seemed to be financially sound just a few years ago, forced me to dig deeper to see which companies are most vulnerable to the thermal coal slide.
Walter Energy still prides itself as having one of the highest grades of metallurgical coal in the world, but it is currently suffering from weak coking coal exports. An agreement between BHP Billiton Ltd. and labor unions in Australia could cause a further increase in the supply of coking coal, possibly resulting in a $15 drop per metric ton from $225 to $210. Despite the company's recent credit downgrade to BB-, Walter Energy is still sitting on half a billion in cash and tries to keep its short term debt under $100 million. With the acquisition of Western Coal, the company was still able to bring in $632 million in revenues last quarter, an increase of $409 million from the first quarter of 2011. I'm not worried about WLT's ability to meet its debt obligations, but competitive pricing is still a concern with Billiton Mitsubishi Alliance comprising and controlling roughly 18% of the world's coking coal.
Alpha Natural Resources is definitely in dire straits with its large debt of $3 billion versus its cash stockpile of $589 million. Just like Walter Energy, it produces both thermal and metallurgical coal. Approximately 70% of its coal reserves consist of low-sulfur, high-Btu coal, which normally sells at a premium to the lower Btu, higher sulfur coal. Its acquisition of Massey Energy in 2011 was the wrong idea in my opinion, especially right after the horrible explosion in West Virginia that left 29 coal miners dead. Alpha had to spend almost $210 million to increase mine safety measures, pay fines, and, of course, pay the families of the miners. With Brazil accounting for the largest portion of its export sales, I am worried that the stock can fall even further due to increased international risk.
With a moderate dividend yield of 1.46%, a P/E ratio of 6.5, and a PEG ratio of 0.87, Peabody Energy is a steal at $22.44. BTU's low valuation is due more to weak industry demand and historically low natural gas prices than company-specific problems. Industrywide cuts in thermal coal production for the rest of the year are expected to provide some pricing support, but metallurgical coal still continues to be a strong export, particularly to China, for Peabody Energy. According to the data gathered by the Energy Department, metallurgical coal represents approximately 65% of U.S. fuel exports.
Arch Coal is a different story; it is walking in the footsteps of Patriot. It first rolled out a loan of $302 million and is now asking a U.S. bankruptcy judge to approve a portion of the loan while it shifts around expenses and cuts labor costs to prop up its income statements. Paying its employees and funding their pensions and health care also continue to be financial setbacks for the company, since these costs will amount to $100 million this year alone. In addition, due to its 2007 spin-off from Peabody Energy, ACI has an accrued liability of almost $700 million in pension and medical benefits that it will pay for many retirees. I'm bearish on Arch Coal, as I don't see demand rebounding anytime soon. The company burns through cash at an accelerated rate, and the constant borrowing is a cry for help.
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