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Assessing The Impact Of New EPA Regulations On Coal Miners

|Includes: Walter Energy, Inc. (WLT)

While some industry experts have long ruled out coal as an answer to the world's future energy problems, coal is an important part of the energy puzzle that we cannot do without. European countries that have been at loggerheads with Russia over gas supplies are resorting to coal in order to guarantee their energy security. In the United States, lots of uncertainties abound for the industry. Walter Energy, Inc.(NYSE: WLT),one of the world's largest suppliers of metallurgical coal, has been struggling in the last two years as a result of lower met coal prices and increased regulations.

Newer regulations targeting the coal industry have resulted in increased job losses in the sector. For now, they target coal reserves containing higher concentrations of sulphur, mercury and other pollutants. Earlier this month, another set of regulations were issued that are aimed at reducing greenhouse gas emissions in the United States by 30 percent in the next 20 years, with most of these reductions expected to come from coal. For coal miners, this means increased production costs as well as lower market demand as we are likely not to see any new coal fired power stations.

Shares of Walter Energy, Inc. are trading at their lowest in five years. The company has posted losses for the past two consecutive quarters as it struggles to deal with high production costs and lower revenues due to depressed prices. The outlook does not seem good in the short-term. Excess supply on the market from Australia and the slowdown in the Chinese economy are some factors that will continue to see coal prices remain low.

In order to meet its cash needs, the company has been taking on more debt. For the whole of 2013, the company borrowed about $380 million, pushing its equity to debt ratio above 400 percent. Should coal prices recover quickly, it would be easy for the company to meet its debt obligations, otherwise Walter Energy, Inc. could be moving closer towards insolvency. In the meanwhile, management has introduced some measures to cut the cash burn rate such as abandoning some unprofitable mines in Canada and reducing capital expenditures. Sales of some non-core assets could bring in more than $300 million, but this move remains uncertain.

Depending on whether you believe the coal industry has a future or not, Walter Energy, Inc. could represent an attractive opportunity. As some industry experts have been saying, latest EPA regulations could lead to average electricity bills increasing by fivefold. Controversy surrounding fracking and political instability in key gas and oil producing regions means that it is difficult to do away with coal. Another trend that we would continue to see is increased exports of U.S. coal to Europe, where regulations on the fuel are much more lax. So definitely, coal could make a comeback, and choosing to invest in this company means you should be willing to wait long as that reality sinks in.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.