Massey Energy Posts Big Number But Big Charge Too

Massey Energy (MEE) has reported one heck of a number, but has a very big charge for a legal dispute which is marring the quarter. Again these are 2009 stories, not 2008, so anything now is "cake." Analysts were in at $716M revenue and $0.77 EPS. Both revenueand the bottom line was a smash hit. With the charge for accrual for litigation with Wheeling-Pittsburgh Steel Company they lost a whole lot of money. Ex-charge the results came out like this...

• Massey Energy Company today reported a year over year increase of 38 percent in second quarter produced coal revenue and an 8 percent increase in produced coal tons sold, highlighting the strength of the Company's expanding operations in Central Appalachia.
• Produced coal revenue for the quarter was a record $710.3 million compared to $516.2 million in the second quarter of 2007. (total revenue $827M)
• Produced tons sold reached 10.8 million in the quarter compared to 10.0 million in the second quarter last year.
• In addition to the higher volume, the increased produced coal revenue was driven by an 83 percent increase in export shipments and a 36 percent increase in metallurgical coal sales.
• This combination resulted in average produced coal revenue per ton of $65.78, up 28 percent compared to the second quarter of last year.
• For the second quarter, net income excluding the WP litigation charge was $92.2 million or $1.15 per share compared to net income of $34.9 million or $0.43 per share in the second quarter of 2007.

Litigation Charge

 

• During the quarter the Company booked a pre-tax charge of $245.3 million related to the ongoing litigation with Wheeling-Pittsburgh Steel Company ("WP litigation charge" - see note 2). This charge offset the strong operating results of the quarter. Including the WP litigation charge, Massey reported a net loss of $93.3 million or $1.16 per share for the second quarter of 2008.

Coal Market Overview

 

• Eastern U.S. steam coal prices increased dramatically during the second quarter, driven by continued strong demand from the export market. Pricing for prompt delivery NYMEX spec coal increased approximately 85 percent from March 31 to June 30, ending the month and quarter at nearly $140.00 per ton.
• Bench mark prices for metallurgical coal have been established at $300.00 per metric tonne, FOB terminal. Massey has been able to sign supply agreements at this price. (nice)
• "During the quarter we made extensive visits to some of the world's most rapidly developing countries," Blankenship added. "Based on discussions with customers and potential customers, and visits to several power and coke construction projects, I came away convinced that the world's need for coal will continue to grow at a rapid rate. (hedge funds disagree - oil down $3, coal stocks must be sold)
• The high quality and diversity of the coal we produce as well as our leading market position in Central Appalachia will enable us to compete effectively to serve these growing export energy markets. We are particularly pleased to have reached agreements on several multi-year deals to supply coal to Asian customers."
• In spite of all-time high prices, Central Appalachian coal production declined by an estimated 0.7 percent in the first half of 2008 after being down 4.5 percent in 2007 according to the U.S. Energy Information Administration.
• Total U.S. exports of metallurgical coal have increased 55.5 percent year-to-date with over half of the increase being shipped through Southeast Atlantic ports.

Hint Hint?

 

• Vertical integration by steel producers has and will continue to drive consolidation within global metallurgical coal production and could result in additional supply constraints. [Jul 18: Wilbur Ross Believes M&A Activity in Coal Will be Unprecedented in Next 12 Months]

Guidance

 

• The Company continues to project 2008 produced coal shipments will be between 41.5 and 43.0 million tons, with average produced coal realization between $65.00 and $66.00 per ton. Excluding the WP litigation charge, average cash cost per ton for the full year 2008 is expected to be between $47.00 and $50.00. Other income is expected to be between $20 and $100 million. (doesn't matter - tell me about 2009)
• For 2009 Massey expects produced coal shipments to be in the range of 46.0 to 48.0 million tons, 13.0 to 14.0 million tons of which will be metallurgical coal. For the total tons shipped, the average price is expected to be in the range of $84.00 to $92.00 per ton. (so a 50% increase over 2008 levels)
• The Company currently has approximately 6 million unsold or unpriced tons for 2009, substantially all of which are of metallurgical quality. (so a bit under half your metallurgical coal is unpriced, and this product is selling for $300 I hear? Nice)
• Cash costs for 2009 are expected to be in the range of $52.00 to $60.00 per ton.
• Based on current coal market conditions and the Company's expansion plans, Massey expects to ship approximately 50.0 million tons in 2010, 15 million tons of which are expected to be metallurgical coal. (Thanks for the data but hedge fund computers don't think that far out)
• The Company has approximately 30 million unsold or unpriced tons for 2010, of which approximately 12 million tons are of metallurgical quality. (shiver me timbers - 60% of all production is unpriced and 80% of met coal is unpriced)
• While it is difficult to accurately project pricing 2 years in the future, the Company expects strong pricing for its remaining unsold 2010 tons. Current expectations are that 2010 average price realization will be in the range of $115.00 to $132.00 per ton. (so you're trying to sell me a fish tale that prices will be double 2008 levels? Nah, don't believe it - hedge funds say the story is over soon and it's time to sell commodities - it was a fun ride while it lasted - time to buy banks and retailers. Nice try Massey.)

So there is a lot of information above. I'd even consider it bullish. But.... NONE of it matters. If crude is down, these stocks are to be sold like the rubbish they are. If crude is up, these are the best stocks in the universe - you better get yourself some.

And that, folks, is the simplistic thinking the hedge fund programmers have built in their highly automated quant driven computers. It really is as simple as that. For now. One day sense will return.

Disclaimer: if Asia decides it no longer wants to move into the 21st century and ships all its newly urbanized citizens back to their rural hinterlands, shuts down its factories, returns to electric grid levels of 1980s, returns to 1970s levels of factory production, the above stock must be sold along with all other coal stocks, and in fact any fertilizer stock. Also Brazil will devolve into a 2nd world country with rampant inflation, a disappearing middle class, and less than AAA credit rating... like, say, the United States.

Disclosure: Long Massey Energy in fund and personal account - knowing fundamentals mean little nowadays - I'll win if crude goes up, I'll lose if crude goes down - because obviously they share the same color and thus coal is no different than crude - and every day we just wake up and roll the dice at the giant craps table called "crude oil price", and all the fundamentals of our global stocks matter little. And yes it's getting old, if you haven't read between the lines.

Comments

[jpe375:]

Oil was up today and almost the whole energy sector was down. What do you attribute that to?? Thanks for your analysis.

2008 Aug 01 04:30 PM

[pooramerican:]

Oil is in a downtrend, till it tests $117 then we will see. I personally we see $95-105 and stale there for a while.I think funds are selling energy companies and buying refiners. I am thinking about picking up valero, SOLF and IPI but I am going to wait a little bit.
later on, probably around oct. I would like to buy BTU, ABX , TCK.

2008 Aug 02 12:31 AM

[nycDem:]

It IS getting old. Watching the ticker the other day, USO goes down...CHK/XTO/MOS/BTU... goes up. USO goes up...and all these babies go down. Like kids on a seesaw.

Eh...at least coal is the same color as crude. Even shares the same first letter.

But NG, fertilizer? C'mon, people! Maybe the hedgies are on vacay and haven't had time to enter in some new algorithms.

I hate this market now. It's no different than a roulette wheel. Can we please get back to rewarding fundamentals? Seems energy went from being Prom Queen to the buck-toothed fat girl in the course of one week. Why? Just b/c the hedgies said they liked Merril's taking out the trash so much.

Pffft! Fine go ahead and invest in financials right now. Personally, I think it'll feel no different than getting run over by a garbage truck.

I remain long XTO and CHK. I've got October $55 calls I bought at the recent low. Maybe I'm a fool. But I'm hoping it'll be a cold winter.

2008 Aug 02 02:26 AM

[Breadnight:]

Trader Mark is right about coal, it is a 2009 story. Everyone who comments here speaks about oil. I don't see the connection b/w oil and coal. - You cannot replace one with the other (unless you're running a steam locomotive!)

Once oil bottoms, go long coal, and bet the house. What a lot of people are missing however, is that US coal is rarely related to coal demand in China -which is THE story.

If you want to play in the coal sector, pick companies with diverse asset bases in Australia and Indonesia -thats where China will be getting the extra coal.

Once the fundamentals begin to matter again, and hedge funds incorporate a less sporadic strategy, coal will be a big winner.

2008 Aug 02 04:05 AM

[nycDem:]

Sorry, my comments were wrong. USO goes up...all the "oil-related" stocks go up (not down). Too much late-night blog posting.

Apologies.

2008 Aug 02 02:43 PM

[TraderMark:]

JPE,
Oil needs to stabilize not just go up for a day or two. A 50% retracement of its 70 to 148ish run since August would take it to 110. So we'll see. I am thinking 100ish because sentiment drives oil and humans seem to love big round numbers. If you have a tin foil hat you might believe oil will bottom a week before the election (grin)

Coal is very different from crude; fertilizer is very different from crude. But in a world where hedge funds are the marginal decider of all stock prices, they might as well all be the same thing.

2008 Aug 02 03:04 PM

[JJTERRITO:]

I really hate to admit it but Hedge Funds,rational or irrational still hold sway.They can trade on any Market and 24 hours a day.Information overload and analysts set things topsy turvy;ie.miss the analysts' estimates by one cent and the stock caves.Tere are too many conflicts of interest on the street.Until banks will be banks and investment bankers limit themselves to underwritings,pandemon... will reign.

2008 Aug 02 09:58 PM

[tuskagee:]

The SEC absolutely needs to blow the whistle on the shorting and hedge fund shenanigans before the whole market implodes.

2008 Aug 03 10:07 AM

[pachanguero:]

Outstanding stuff Mark as always.

What three top picks do you have for a new slug of money to go long in this sector.

I am talking about a three year time frame. Any thoughts?

And second did you hear the CC on PCX? I swear the analysis's were accusing them of low balling their future earnings. Like they were lowering expectations now and going to try and over deliver. Am I making any sense?

2008 Aug 03 05:18 PM