Massey Energy: Earnings Scorecard

| About: Alpha Appalachia (MEE)

U.S. coal producer Massey Energy Company’s (NYSE:MEE) second quarter results on July 27, 2010, came in below expectations as it struggles to recover from the recent Upper Big Branch (UBB) mine accident. The ongoing inspection and enforcement activity due to the UBB tragedy continues to hurt the company’s smooth functioning, resulting in reduced productivity. This is influencing the bearish sentiment among analysts.

Turning to the Quarter

Massey Energy reported a second quarter adjusted loss of 2 cents per share (excluding Upper Big Branch mine tragedy related charges), way below the Zacks Consensus Earnings Estimate of 33 cents. The decline in the quarter is primarily attributed to the disruption caused by the Upper Big Branch mine blast.

Net revenues in the reported quarter jumped 16% year over year to $810.1 million, mainly due to higher average prices realized on produced coal volumes. Total shipments in the quarter were short of the company’s expectations by 1.0 million tons.

Produced tons sold in the quarter totaled 9.8 million compared with 9.4 million in the year-ago quarter. In the quarter, metallurgical and industrial coal shipments represented 21% and 8%, respectively, of total tons sold.


Following the second quarter earnings release, the estimate revisions of analysts are trending downward. In the last 7 days, two (out of 14) analysts have slashed their earnings estimates for fiscal 2010, while 4 (out of 19) analysts have cut their estimates for fiscal 2011. Unsurprisingly, none of the analysts showed upward revisions in the past 7 days, as the effects of the UBB mine incident still continue to weigh on the company’s results.

Annual estimate revisions, over the last 30-day period, also were largely negative, though there were a few disagreements to this trend. The visible downward trend, with 6 analysts lowering fiscal 2010 estimates and 7 analysts lowering fiscal 2011 estimates, was counteracted by upward estimate movement by an analyst each in fiscal 2010 and 2011.


Based on the number of estimate revisions over the last 7 days, annual estimates dipped 6 cents for 2010 and 11 cents for 2011. Over the one-month period, estimate revisions point to a 14-cent decline in the 2010 estimate while figures for 2011 slipped by 39 cents.

Long-term Neutral

A producer of nearly 40 million tons of coal annually Massey Energy enjoys a strong market position with operations primarily in Virginia, West Virginia and Kentucky. The company has coal supply commitments to a wide range of electric utilities, steel manufacturers, industrial customers and energy traders and brokers, which will enhance its operations. Moreover, we believe Massey has one of the strongest balance sheets in the industry.

However, the recent incident at the UBB mine has strained the company’s productivity and imposed increased regulatory controls in Central Appalachian mining, making the region unviable for mining operations. Since the mishap, the company has faced a greater degree of regulatory scrutiny which has affected its other operations. The uncertainty regarding the date of re-opening the UBB mine remains a cause of concern for the company.

On the positive side, Massey is working hard to recover from the incident. As a strategy, the company plans to replace 1.3 million tons of metallurgical production lost from Upper Big Branch through increased shifts and additional continuous miner sections at its other metallurgical mines, which we view as a positive step.

Additionally, Massey is sketching out alternatives to access the coal reserves that had not been mined at Upper Big Branch. This however is subject to regulatory approval, which is likely to be negative.

Altogether, we like Massey for its well capitalized coal production capacity, high quality diversified reserves, met coal infrastructure, advantageous market share in Central Appalachia and strong balance sheet. We believe the effects of the UBB tragedy, though likely to be a drag in the near-term, will be mitigated over the long-term, re-positioning the company to benefit from the improving coal fundamentals.

We maintain our long-term Neutral recommendation on Massey, though the recently downgraded short-term Zacks Rank #4 (Sell) suggests underperformance in the near-term.

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