Coal producer Alpha Natural Resources (ANR) is having a terrible time in 2014. The company's shares have been beaten down badly on the stock market, down almost 35% so far this year. The drop in coal prices and an uncertain demand for metallurgical coal have weighed on Alpha Natural's performance this year. However, there could be some relief in sight for the company as its recent first-quarter results tell us.
A turnaround in progress
On the back of aggressive cost cutting, Alpha Natural managed to lower its loss in the first quarter as compared to the prior-year period. In fact, the company halved its loss to $55.7 million, or $0.25 per share, in the first quarter from a loss of $110.8 million, or $0.50 per share, in the same quarter last year. This was a tremendous performance considering its revenue was down almost 17% from last year. Alpha Natural reduced costs by almost 11% year over year and managed to turn in estimate-beating results.
Looking ahead, Alpha Natural's aggressive cost-cutting moves should help the company improve its business further. The company is trying to build a new platform that would enable it to be more flexible and agile, allowing it to quickly respond to changing market conditions.
Positive signs for the future
Alpha Natural has been proactively managing its balance sheet as the company has extended the maturity profile of its debt obligations. It issued $690 million of senior convertible notes, with $355 million due late in 2017 and $345 million due in 2020. By using a significant portion of these proceeds to repurchase existing convertible notes, Alpha Natural has reduced its outstanding convertible notes maturing in 2015 from $824 million to $194 million.
In addition, Alpha Natural termed out its bank debt, which lowered its near-term repayment obligations significantly. In addition to successful convertible note offerings, Alpha Natural monetized a portion of its Marcellus gas acreage for a total consideration of $300 million, consisting of $100 million in cash and $200 million in shares of Rice Energy at the IPO price, or approximately 9.5 million shares.
Also, the company is selling off its non-core assets. Late last year, Alpha Natural was engaged in four transactions to dispose certain non-strategic idle assets, according to management. The cash proceeds from these dispositions were modest. However, the transactions allowed the company to reduce liabilities, primarily asset retirement obligations, which will reduce future cash outflows from its idle properties.
Demand could pick up
However, cost cutting can take you some distance, but after that Alpha Natural will need to find ways to grow its top line. There are some positives for investors in this area as well. On the demand side, the World Steel Association is forecasting a 3.3% increase in 2014 global steel demand, a slight improvement over last year's growth rate. More importantly, for Alpha Natural, the European Union steel demand is expected grow in 2014 with a forecasted growth rate of 2.1% versus an estimated decline of 3.8% in 2013.
On the supply side, limited growth is seen for 2014 as only a few mines are scheduled to come online. According to estimates, total exports in 2014 are estimated to increase by only about 10 million metric tons of which 6 million tons are from Australia. So, with favorable demand and supply signs, Alpha Natural can expect to see further improvements in its performance going forward.
In addition, the domestic thermal coal market is showing some promising signs. The continual coal spills experienced late last year have resulted in increased demand and interest in coal-fired electrical generation. This demand, in turn, is expected to accelerate the drawdown in utility stockpiles across the various regions.
Also, electrical generators and grid operators are focusing on the role of coal fire generation and are looking to maintain a reliable energy supply. Moreover, many utilities have not only been bringing coal generation back online, but are running it at full capacity.
According to Alpha Natural, the domestic market has strengthened and the company expects to get its share of any additional domestic demand in the markets it serves. It also continues to focus on thermal exports, recognizing the price sensitivity in these markets and the need to be opportunistic with the ability to clearly respond to opportunities available.
Alpha Natural has a pretty weak balance sheet. Its cash position is just $970 million while it has a huge debt of $3.43 billion. However, as we saw above, the company has extended maturities, selling off non-core assets, and aggressively reducing costs. In addition, there's a slight improvement expected in the end markets. So, investors could consider an investment in Alpha Natural as the stock is trading at depressed levels and it could see a turnaround going forward.
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.