As a thermal, metallurgical coal and coke producer, Walter Energy (NYSE:WLT) has been operating in two continents for over 30 years. The main markets for WLT include the USA, Canada and the UK. WLT runs various underground and surface mines, coke plants, as well as a coal bed methane gas plant in the United States.
When the Obama administration initiated the clean energy initiative in the US, the Chinese economy started to slow down, and worldwide prospect for coal as an energy source was gloomy at best. About the same time national gas prices went south during 2011 and solar power became more affordable. Coal, regardless of those "clean coal" TVCs, was substituted with gas as the raw material for electricity generation. The changing scenario in the energy sector meant only bad news for coal producing companies such as Walter Energy.
Since April 2011, Walter's stock has been on a steady decline. Its stakeholders saw the share price vaporizing from $141 to $10, a 93% decline within a span of two and a half years. Any investor who saw potential for investment in WLT while the stock was heading south would have learned a life lesson by now.
18 out of 20 buy recommendations by industry analysts on Walter Energy since April 2011 have proved to be wrong - the return was negative after all. In contrast, David Lipschitz' sell recommendation on Walter back in October 2012 when the stock was $30 per share, generated a whopping 60% return.
Walter Energy's Q2'13 financial results highlight earnings per share at $0.55, 4 cents higher than $0.51 from Q2 a year ago. The EPS turned out to be 28% better than what analysts had forecast. As a result, the dead cat bounced 47% from $10 a share to $14.69 (September 6 market close).
You may wonder why am I calling this a dead cat bounce? When the stock broke north, allegedly because of higher than estimated EPS, Walter's Q2'13 EBITDA came out at $37 million, 28.84% lower than the consensus estimate by the industry analysts. Not to mention, revenue dropped almost 34% year-over-year in Q2'13. The better than expected EPS was a direct outcome of a government tax benefit of $4.8 million during the first two quarters of 2013. Also, lower depreciation compared to Q2'12 made a positive impact in the Q2'13 balance sheet.
Instead of looking at the short-term quarterly balance sheet, Walter's future is directly correlated with the overall situation in the global coal industry. Regardless of how American producers cut the output, this won't be enough to offset the decline of met coal prices, primarily because of poor demand for met coal. The demand for steel has stalled in Asia, and Russian and African met coal is oversupplying the market. The market outlook for the rest of 2013 remains anemic at best. So it's very likely that Walter Energy won't reverse its fortune anytime soon.