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Can't Ignore These Three Positive Comments

MET COAL vs.THERMAL COAL

We all know coal has been one of the worse performing sectors to invest in over the past couple years. It seems all news on coal is negative news. Damaging remarks from the Environmental Protection Agency (EPA) limiting carbon emissions caps the amount of coal new coal power plants can burn. This doesn't bode well for thermal coal players or investors who want to jump back into the sector. Many authors have brought up that majority of Walter Energy's business is metallurgical coal based and shouldn't be tied toward thermal coal, mostly used to generate electricity. This news shouldn't hurt WLT much and analysts are noticing.

WALTER HAS MORE UPSIDE

As of Sept. 18th, 2013, WLT's stock sat at $14.74. Currently the price of the stock sits at $14.19 based on the closing price as of Sept. 27th. Recent news for Walter Energy has been more positive but negative comments and headlines are overblown and priced into WLT's stock price. These are levels that don't price in the good news based on the negative thermal coal news that Walter rarely tied too. Three agencies/analysts have either upgraded or provided positive comments just this past week. This has come as a huge surprise to me as to how quickly they've changed course on the metallurgical coal company's future.

TIMELINE:

  1. On Sept. 19th, WLT increased its debt offering as risk appetite for yield for WLT increased from $350M to $450M. Aggregate demand was oversubscribed as senior notes were increased. With the proceeds, WLT will retire $250M of Term Loan A and remaining proceeds will be added to cash balance. Moodysprovided positive comments when it expected met coal prices to improve and upgrades Walter's debt outlook. The upgrade reflects WLT improved liquidity and debt maturities.
  2. On Sept. 26th, Morgan Stanley analyst, Evan Kurtz, lifts his LT met coal target to $180/ton and thinks WLT could hit $33 or about 140% upside from current levels.
  3. On Sept. 27th, Goldman Sachs upgrades shares of WLT from sell to neutral and increased its price target to $15 from $10.

-Obviously potential upside can't be ignored as Moodys comments confirm Walter Energy's upgraded balance sheet with added liquidity. As of Q2'13, based on the quarterly conference call, they have $171M in cash and $317M available in revolving credit facility. An added $200M in proceeds from debt offering will be added to the balance sheet. Another potential $250M in asset sales/JV over the next 9 months is also another added bonus to cash position. In all, this may be equivalent to roughly $938M in liquidity and cash equivalents over mine months or roughly $688M currently.

-Evan Kurts is definitely more bullish than most as other analysts have price targets under WLT current price.

-Goldman, to me, seems like its playing catch up versus the overall market since it increased its price target by 50%.

CONCLUSION

WLT's current price is lower than its Sept. 18th price before in the three positive comments/upgrades. Negative EPA comments have killed the stock which WLT shouldn't even be associated with. The positive news isn't priced into the stock and Walter is being punished for being associated with the thermal coal sector.

Disclosure: I am long WLT.