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Tim Travis is a veteran deep value investor and money manager. Travis has extensive experience in traditional investments such as stocks and bonds, in addition to having a unique methodology of combining options and distressed investing with value investing to generate income, reduce risk, and... More
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  • Cheap Coal Is Dead. Long Live Renewables-Bloomberg 4 comments
    Jun 20, 2012 3:58 PM | about stocks: ANR

    This article is bad news for coal companies hoping that India and China would be the key to raising prices. While I do believe that coal will remain a key cog in a comprehensive energy plan, I do think that cheaper natural gas, and improving renewable alternatives are decreasing long term demand for coal. The companies that survive will be the ones that aren't burdened by large debt loads, and companies that can produce the coal for the lowest costs. Alpha Natural Resources (NYSE:ANR) is a perfect example of a coal company with wonderful assets, but by paying too much for Massey Energy, the company's survival is now in doubt.

    http://www.bloomberg.com/news/2012-06-19/cheap-coal-is-dead-long-live-renewables-part-1-.html

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: ANR
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Comments (4)
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  • jobu1642
    , contributor
    Comments (8) | Send Message
     
    Why exactly is ANR's survival in doubt? They obviously overpaid for Massey in hindsight but please connect the dots to a BK.
    26 Jun 2012, 11:25 PM Reply Like
  • Tim Travis
    , contributor
    Comments (541) | Send Message
     
    Author’s reply » I don't believe that ANR is in serious trouble this year necessarily, but they have significant debt maturities in 2013-2014. When you combine those with the fact that the company is losing money at an accelerated rate, the possibility does exist. I'm not sure what the future is for coal but I do believe that there is additional downside potential which can be lethal for a company after an overpriced acquisition, as their cash flows are dependent on the commodity. If the bonds on ANR begin yielding 13%+ I believe the debt would be a great way to play it, and if prices recover the stock could be a home run trading at .2 an arguably inflated book value. If you are bullish on coal I believe that Peabody (BTU) would be a more attractive way to play it as they will be one of the consolidators in the industry.
    27 Jun 2012, 01:18 AM Reply Like
  • jobu1642
    , contributor
    Comments (8) | Send Message
     
    To be clear, of their approx $2.9 billion in debt, about $900m comes due in 2015, $600m in 2016, and then the rest 2019 and later. Big difference than 2013. They've obviously had recent losses given the state of the industry, but they have been operating cash flow positive and coal companies can right size very quickly to adapt. It's very hard to kill a coal company, and while the Massey purchase was a terrible deal in hindsight, looking at the facts it's quite a leap to conclude their survival is in doubt. I agree that BTU is a safer bet overall, but assuming there is somewhat of a coal comeback, to me ANR is clearly one of the survivors....
    27 Jun 2012, 07:06 AM Reply Like
  • Tim Travis
    , contributor
    Comments (541) | Send Message
     
    Author’s reply » You are correct and I apologize as I responded more quickly than I should have and accelerated the maturities. Below is the debt maturity schedule. The key will be if the company needs continuous access to the capital markets. Right now it would be very difficult to raise money with the stock trading at this multiple and with the uncertainty in coal. I don't want you to think I am speculating or forecasting that a bankruptcy is likely, but I do believe the possibility is there over the next couple of years if prices don't rebound. ANR has great assets so it would be a steal for someone with deeper pockets to pick up, but we are seeing some transformational changes in the energy industry with huge growth in natural gas supplies, and I'm just not sure if coal's weakness is merely reflective of a global economic slowdown, or a larger secular decline in the industry. It's in the "too hard pile" for me and I'd rather play the debt. Thanks for your comments.

     

    Alpha Nat Resources 6%
    06/01/2019
    800.0
    Middle
    0.0
    6.000
    Fixed
    Yes
    No
    ---
    Alpha Nat Resources 6.25%
    06/01/2021
    700.0
    Middle
    0.0
    6.250
    Fixed
    Yes
    No
    ---
    Foundation Pa Coal 7.25%
    08/01/2014
    300.0
    Middle
    ---
    7.250
    Fixed
    ---
    ---
    ---
    Foundation Pa Coal 144A 7.25%
    08/01/2014
    300.0
    Middle
    ---
    7.250
    Fixed
    Yes
    Yes
    ---
    Foundation Pa Coal 7.25%
    08/01/2014
    300.0
    Middle
    ---
    7.250
    Fixed
    Yes
    No
    ---
    Alpha Nat Resources Cv 2.375%
    04/15/2015
    287.5
    Middle
    86.4
    2.375
    Fixed
    No
    No
    7.85
    27 Jun 2012, 11:12 AM Reply Like
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