Alpha Natural Resources (ANR) is a diversified coal producer with operations in Powder River Basin, Central Appalachia and Northern Appalachia. The company's earnings are sensitive to both thermal and met coal operations, as it produces and sells both thermal and met coal. The company has been going through difficult times due to soft coal market conditions, and has struggled to post a healthy financial performance recently. Due to the tough business conditions being faced by the U.S. coal industry, coal companies have lost a significant amount of market capitalization in the recent past. ANR's stock is down 38% year-to-date. Despite the ongoing soft coal market conditions, I believe the stock has the potential to offer investors attractive returns once coal markets strengthen. ANR has been improving upon its cost structure to support its feeble bottom line results. Also, the current depressed valuations and strong liquidity position make me bullish on the stock.
The U.S. coal industry has been going through tough times due to weak economic conditions, lower natural gas prices and an unfriendly political environment towards coal consumption. Also, over supplied coal markets have led to weak coal prices.
As business conditions for the company remain tough, it has been working to reduce its costs to support its bottom line results. ANR is committed to lowering its Western operation cost by nearly 3% to $10-$10.50 per ton. Also, to preserve cash and strengthen its liquidity, in the recent third quarter, the company lowered its capital expenditure (CapEx) by $25 million for the full year (2013). According to the last earnings release, ANR's liquidity stands at $1.9 billion, out of which $1 billion consists of cash and marketable securities. The healthy liquidity position bodes well for the company, as it provides a cushion to survive through the ongoing tough business conditions. Also, the company does not have any long term debt maturity until 2015.
As the company has been working to control its operations and capital expenditures, these efforts will help the company preserve cash to survive the current tough business conditions. According to BB&T Capital analyst, Mark Levin, ANR has 20,000 acres of the Marcellus Shale that the company can sell to improve its liquidity position. If the company plans to sell the property, it can generate $100 million-to-$140 million. Even though the sum is not that significant, it will certainly improve the company's financial flexibility to some extent.
An important driver for the company's future earnings potential remains a recovery in met coal prices. Met coal prices are likely to improve in the future, as more production cuts will be announced and demand will strengthen. Lately, met coal prices have improved, as the spot met coal price has increased 20% since July 2013. Also, the met coal benchmark price for the ongoing fourth quarter increased 5% QoQ to $152 per ton. I believe we will witness further improvement in coal prices, as more production cuts will be announced. ANR has already announced to reduce its annual met coal production by 1 million ton, in response to weak market conditions. ANR might announce further production cuts in the upcoming earnings releases to rationalize the over supplied coal markets. ANR is scheduled to announce its 3Q2013 financial results on October 28, 2013.
I believe, ANR has the potential to benefit from an upside in coal prices and demand. Also, ANR remains a good investment option for investors to play a coal market rebound, as the stock is currently trading at depressed valuations; it has Price/Sales of 0.20x and Price/Book of 0.25x. Moreover, ANR's cost control measures and strong liquidity position bode well for the stock price. Therefore, I reaffirm my bullish stance on the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.