Alpha Natural Resources - Holding Is Best Option As Near-Term Met Coal Market Outlook Remains Dodgy

| About: Alpha Natural (ANRZQ)

Alpha Natural Resources (ANR) has exposure to both thermal and met coal markets, and is likely to benefit from a recovery in both markets in the long term. The company's mines are located near ports, which also allow it to benefit from strengthening in global market trends. I reiterate my 'hold' rating on the stock, as the near term met coal market outlook remains challenging. However, thermal coal markets are showing signs of a recovery, due to a rise in natural gas prices, lower coal inventories and higher coal-fired electricity generation.

Financial Performance
The company reported better than expected financial results for 4Q2013. ANR registered a loss per share of $0.52 for 4Q2013, beating consensus estimates of loss per share of $0.61, down from a loss of $0.19 per share in the corresponding period last year. The company reported annual revenues of $1.09 billion for the recent fourth quarter, down from $1.56 billion in 4Q2012. As the coal industry has been going through a rough patch, companies are targeting cost control measures to support its bottom line results. Cost control efforts were among the primary reasons for ANR's recent quarter earnings beat. In the fourth quarter, ANR lowered its Eastern coal adjusted cost of sales by $7/ton to $67/ton. Also, the company was able to lower its selling, general and administration (SG&A) expenses by 24% year-on-year to $159 million in 2013. Moreover, the company lowered its operating and support expenses by $150 million in 2013. However, revenues for the company were adversely affected by lower tons sold and soft coal prices. In 2013, ANR observed an 11% and a 20% drop in average realized price per ton and coal tons sold, respectively.

The company expects SG&A to be in a range of $110-$140 million in 2014, as compared to $159 million in 2013. Also, the company lowered its depreciation and amortization expense by $50 million to $650-$750 million and is aiming to lower eastern coal costs by 7% in 2014. To further support its bottom line results in the tough market conditions, the company is likely to drive additional $200 million in operating and support cost savings under the restructuring program, which I believe will portend well for the stock price in the near term.

ANR expects total coal shipments to be in a range of 77-90 million tons, as compared to actual shipments of 87 million tons in 2013, down from the prior guidance range of 79-90 million tons. As the met coal markets remain oversupplied and prices remain weak, the company lowered its met coal sales guidance from 18-20 million tons to 16-18 million tons. Consistent with ANR's initiative to curtail met coal production, I believe other met coal producers, like Walter Energy (NYSE:WLT) and Arch Coal (ACI), should opt for production cuts to balance the met coal market, which will result in a price recovery.

ANR maintained its midpoint sales volume guidance for Western steam coal of 38.5 million tons. However, the company raised Eastern steam coal guidance by 1 million tons to 27 million tons in 2014. ANR is hedged 98% and 76% for eastern steam coal and PRB, respectively, for 2014, which provides revenue certainty for the segments. However, the company is only 58% contracted for met coal for 2014, which I believe provides a downside to the stock price as the met coal markets remain weak.

ANR has been making efforts to preserve cash to pass through difficult industry conditions. The company ended 4Q2013 with total liquidity of $1.9 billion, down from $2 billion in 3Q2013. Total liquidity includes $1 billion of cash equivalent and securities. The company does not have any debt covenants until 2015. Also, the company did well to extend debt maturities and has no debt maturity until 2018. As the coal market conditions remain tough, the company is likely to burn cash in a range of 0%-12% of liquidity.

Also, the company lowered its capital expenditure outlook by $50 million to $250-$300 million for 2014. The reduction in capital expenditure is consistent with its cash preservation efforts.

ANR is among the leading coal producers of the U.S. The company has exposure to both met and thermal coal markets. The stock price remains dependent on a recovery of met coal prices and an improvement of European economic conditions. Also, an increase in coal-fired generation will benefit the company's thermal coal operations. Coal-fired electricity generation is expected to increase by 1.3% year-on-year to 40.3% in 2014. The company is managing well to improve its costs structure and improve liquidity. However, due to weak met coal market conditions, as met coal markets remain oversupplied, I reiterate my hold rating 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.

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