It is no secret that depressed coal market conditions prevail in the U.S. at present. The coal ETF (KOL) has underperformed the broad market in 2013; KOL is down 21% YTD as compared to an increase of 19% YTD for the S&P 500 (SPY). Coal prices have fallen to such an extent that it has been difficult for coal producers to recover even their full variable costs. However, I believe that as coal stocks have lost a significant amount of market cap in the recent past, the worst has already been priced in.
Walter Energy (WLT) is among the leading met coal producers in the U.S. The company's stock price has been adversely affected by the tough coal market conditions and the company's weak liquidity position. WLT has lost 62% of its market value since the start of 2013. Last month, WLT secured a credit amendment to improve upon its financial flexibility and announced a dividend cut of 92%. The credit amendment and the dividend cut would allow WLT to survive the ongoing tough conditions in the coal industry. To further improve upon its liquidity position, WLT announced its plan to sell its non-core assets in the next nine months. The sale of non-core assets is expected to generate $250 million in cash, which will be used to enhance the company's liquidity position. The company did not reveal which assets would be sold; however, earlier, the Alabama thermal mines, Wales met mines and West Virginia met mines have been stated as potential asset sales.
WLT's efforts to improve upon its financial flexibility in the tough market conditions are very important. Proceeds from any potential sale of assets could be used by the company to pay off its outstanding debt. The company currently has total debt to equity of 287%. The following table shows the credit rating assigned to WLT by Moody's and S&P.
The company reported a 2Q2013 adjusted loss per share of $0.55, ahead of the street's consensus estimate of a $0.77 loss per share. Revenues for WLT decreased by almost 35% YoY to $441 million in 2Q2013. In the recent second quarter, met coal sales for the company totaled 2.44 million metric tons, which were less than the total coal production of 2.95 million metric tons, leading to a $37 million increase in balance sheet inventory.
The company reported total met coal sales of 1.62 million metric tons for its U.S. segment. Average sale price per ton remained $154 per metric tons, while average cost of sales per metric ton came out to be $101 for the U.S. segment in 2Q2013. Total met coal sales remained strong for the company's Canadian segment, which were 0.82 million metric ton, ahead of analyst consensus estimates of 0.75 million metric ton. Average price for the Canadian operations in 2Q2013 was $143 million metric tons, while average costs were $163 million metric tons.
CAPEX for the company was $46.2 million in the recent second quarter. Also, it once again lowered its full year 2013 CAPEX outlook by $20 million to $150 million. WLT ended 2Q2013 with total liquidity of $488 million, which includes $171 million in cash. Moreover, the company expects its total met coal production to total 11 million metric tons for the ongoing year (2013).
Due to the tough coal market conditions, WLT has been tightening its belt by improving upon its cost structure in order to support its earnings. The company is expected to realize its long-run SGA target of $80 million per year by the end of 2013, down $20 million as compared to the prior estimates. As mentioned above, WLT has also lowered its CAPEX estimate by $20 million for 2013 to improve its financial flexibility.
Analysts are projecting a high average five-year growth rate of almost 25% for WLT. According to analyst estimates, the company is expected to deliver an EPS of $(1.01) and $(2.95) for 3Q2013 and full year 2013, respectively. The following table shows the analyst earnings estimates for WLT from 2013 through 2015.
Met coal markets are expected to improve in the future, as coal demand will increase and coal producers will lower their production to remove oversupply from the markets. I believe production cuts remain an important stock price catalyst for U.S. met coal stocks. The timing and the magnitude of the coal production cut will determine the level and timing of a recovery in the coal market. Once the problem of oversupply in met coal markets is addressed, WLT has the potential to offer investors impressive returns, as the stock is currently trading at depressed valuations. WLT currently has P/S of 0.40x and P/B of 0.9x.