Walter Energy's (NYSE: WLT) shares collapsed following the research note from BB&T Capital that stated that the company would declare bankruptcy in 2015. Shares of Walter Energy lost as much as 29% in a single day as investors got rid of their shares on increased bankruptcy fears. BB&T stated that while Walter Energy has enough cash to last through 2015, the company's board would decide to declare bankruptcy because of the weak met coal market.
The trading action in Walter Energy's shares illustrate how fragile the company's position is. From a fundamental point of view, nothing has changed since November 28, when Walter Energy's shares reached a high of $3.48. On the day BB&T Capital's note was published, shares closed at $1.94. In my view, the BB&T note contained nothing new. Their view that the company should last through 2015 is consistent with my own views. I've previously stated that Walter Energy's survival depends on a met coal rebound in 2015. This rebound should happen closer to the second half of 2015, in order to provide the necessary instruments for Walter Energy's survival. BB&T Capital's statement that the board would reach a decision to file for bankruptcy is an opinion - one cannot get into the heads of others. I should admit that this is a very plausible scenario, and this scenario was known by anyone who follows Walter Energy long before BB&T released its note.
Anyway, Walter Energy's share price drop was massive, and the shares are now not far away from lows seen in October. The drop was caused by market sentiment, rather than by some change in fundamentals. Hence, if market sentiment persists, the shares could go even lower.
Speaking about the possibility of bankruptcy, I think that investors could get a feel of what Walter Energy's management decides to do during the fourth-quarter earnings call. Walter Energy has a $250 million asset sales target. So far, the company only sold the Blue Creek coal terminal for $25 million. In my view, if the company gives a detailed discussion and shows some action on the asset sales, this will be a signal that management will try to navigate the tough waters of met coal market for as long as possible.
The fourth-quarter report is far away, but what should an investor do now? As I've previously stated, investors should be able to exit Walter Energy's shares at $1.50 in the worst-case scenario. For those willing to take an extremely aggressive bet on a met coal rebound, the recent dip could provide a buying opportunity. However, I would rather wait to see if Walter Energy's shares are able to stabilize at the current levels, because the negative market sentiment triggered by BB&T Capital's note could be a big downside driver.
Disclosure: The author is long WLT.
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