I recommend investors keep their distance from Walter Energy (WLT). The company has lost 70% of its market value YTD due to liquidity issues and a downturn in the coal industry. The problems are not fading for WLT, at least in the near term. Met coal prices remain weak due to an oversupply in the coal market. Also, the company is targeting sale of its assets to boost liquidity, which will have a negative impact on the company's earnings potential.
Financial Highlights Q2 2013
WLT reported earnings per share of $0.55 for Q2'13, as compared to $0.51 in Q2'12, beating analyst consensus estimates by 28%. The earnings beat was driven by a lower depreciation expense and a tax benefit. However, adjusted EBITDA of $37 million for Q2'13 missed the consensus estimate of $52 million. Reported revenues for Q2'13 totaled $441.5 million, representing a decrease of 34% YoY. The drop in the recent quarter revenues was primarily due to lower sales volumes and depressed met coal prices. The impact of lower sales volumes and weak met coal prices was partially offset by lower operational costs.
Sales volume for the recent second quarter totaled 2.40 million metric tons (MMTs), down 0.4 MMTs as compared to the corresponding period last year. The average met coal price per ton also decreased by almost 29% QoQ to $150.41 in the second quarter of 2013. Given the weak coal market conditions, the company has been working to improve upon its cost structure to support its bottom line. The cash cost of sales per ton decreased by 9.7% to 122.04 per metric ton.
WLT reiterated its met coal production target of approximately 11 MMTs for 2013; however, third quarter production volumes are expected to be slightly lower than the recent second quarter. The company is committed to reducing its operating and capital expenditures to strengthen its negative bottom line results. WLT lowered its annualized selling, general and administration (SG&A) expenses target by an additional $10 million to $80 million. It also lowered its CAPEX to $150 million and $130 million for 2013 and 2014, respectively.
The company is targeting assets sales of almost $250 million to generate cash in a market downturn. The company did not disclose which specific asset could be sold, but indicated that the transaction is likely to be completed over the next nine months. Despite the fact that the transaction will boost liquidity, if the company decides to sell any of its profitable assets, it would adversely affect the earnings prospects of WLT. If WLT chooses to pay off a portion of its outstanding debt using proceeds of $250 million from the planned asset sale, it can pay off almost 9% of its total outstanding debt. Currently, WLT has total debt-to-equity of 286% and total debt outstanding of $2.61 billion.
Dividend Cut and Credit Amendment
WLT has been aggressively working to improve upon its financial flexibility to survive the ongoing weak coal market conditions. Last month, WLT announced a massive dividend cut of 92% and secured amendments to its credit agreement. The dividend cut has reduced the annualized dividend rate to $0.04 per share from $0.50 per share. Also, the dividend cut is expected to lead to annual cash savings of almost $29 million.
The credit amendment that WLT secured last month gave it some financial flexibility until mid-2014, as it suspends the interest coverage ratio covenant and the senior secured leverage ratio covenant till March 2015 and June 2014, respectively.
Important Stock Drivers
As global met coal markets continue to remain oversupplied, production cuts remain an important stock price driver. Production cuts have started to occur, as coal producers in the U.S., Russia, and Mozambique have curtailed productions, which could help in a recovery in met coal prices. Also, a rise in steel demand in Asia, which will lead to higher met coal consumption, will likely bode well for met coal producers like WLT.
Met coal market conditions remain weak, which are likely to persist in the second half on 2013; until notable production cuts lead to a price recovery. Also, as the company announced to sell assets in the upcoming months to generate liquidity, it creates uncertainty with regards to which assets would be targeted for a sale. Therefore, I recommend that investors remain on the sidelines when it comes to WLT shares.