Alpha Natural Resources (NYSE:ANR) is a diversified coal producer, whose earnings are sensitive to both met and thermal coal operations. Consistent with the coal industry, the company has been struggling to post a healthy financial performance in the recent past due to soft coal market conditions. However, the company has been pushing hard to improve upon its cost structure and preserve cash to survive through the difficult business conditions. Also, current valuations remain attractive for ANR and its strong liquidity position portents well for the stock price. Regardless of the current soft coal market conditions, I believe ANR remains an attractive long term investment option for shareholders to play a coal market rebound.
ANR reported a mixed financial performance for the recent third quarter. The company reported an adjusted EPS of ($0.61), as compared to ($0.16) in 3Q2012, beating consensus estimates of ($0.77). ANR reported an adjusted EBITDA of $33 million, missing consensus estimates of $39 million. Total revenues for the quarter decreased more than 20% year-on-year to $1.19 billion. Top and bottom line results for the quarter were adversely affected by soft coal market conditions, which led to lower met and steam coal prices and reduced sales volume.
Due to the soft market conditions, the company experienced a decline of approximately 25% in sales volume, as ANR sold 21.8 million tons of coal in 3Q2013. The company also narrowed its 2013 sales volume guidance range to 86-91 million tons. ANR also introduced its 2014 guidance during the recent quarter's earnings call. The company expects total coal production to decrease by 5% year-on-year in 2014, primarily led by a 10% reduction in thermal coal volumes. Lower expected thermal coal sales for 2014 will improve the met-to-thermal coal ratio and will mean the company's earnings will be greater leveraged to met coal operations. I believe as we move forward, met coal prices will improve due to better coal supply management and higher demand from China, Europe and Brazil. Met coal prices have recently shown signs of improvement, as the met coal benchmark price for 4Q increased 5% quarter-on-quarter.
ANR has been undertaking cost reduction initiatives to strengthen its bottom line result. ANR anticipates lowering its Eastern operation costs by 7% to $67 per ton in 2014, which will have a positive impact on the company's margins and earnings. Also, ANR has been successful in reducing its operating costs by $150 million per annum, and now it expects to increase its annualized cost savings to $200 million by 2014. The company has also been curtailing its capital expenditures to save cash in the ongoing tough business conditions; ANR lowered its 2013 midpoint capital expenditure guidance range by 8% to $275 million. I believe the company's efforts to reduce costs and preserve cash will portent well for the stock price.
In the tough coal market conditions, the company's natural gas reserves are expected to provide support to its bottom line. The company has 20,000 acres of Marcellus Shale, which contributed $6 million towards the company's total EBITDA in 3Q2013; translating into annual EBITDA contribution of $24 million. The company anticipates Marcellus Shale's EBITDA contribution to double to $48 million by 2014. The support provided to the bottom line result by the company's natural gas exposure portents well for the stock price.
I believe ANR remains a good long term investment option to play a coal market rebound. Also, current depressed valuations, price-to-sales of 0.30x and a price-to-book value of 0.4x make the stock an attractive investment option. Furthermore, the company's improved cost outlook remains an important earnings driver in the future. Moreover, the company has a solid liquidity position, with approximately $2 billion of liquidity, which includes $1 billion of cash and marketable securities; this remains an important stock price driver in the future. Due to the aforementioned factors, I reiterate 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.