Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Rhino Resource Partners, L.P. (RNO), Walter Energy, Inc. (WLT): One High Yielding Coal Stock That Might Make Sense

Page 1 of 2
Rhino Resource Partners, L.P. (NYSE:RNO) stands out from the coal pack because of its around 14% yield. That’s a level at which most investors should assume that a big dividend cut is being priced in. However, Rhino Resource Partners, L.P. (NYSE:RNO) is actually less levered than most of its competitors, giving it an edge in an industry with high fixed costs.

Owning and operating coal mines requires a lot of up front capital. You need to buy or lease the mine, and you need to buy or lease the equipment. It doesn’t matter how much coal is pulled out of the mine or how much you get paid for the coal, those costs don’t go away and they don’t go down. Debt costs raise the bar even further due to the interest being paid.

Walter Energy, Inc. (NYSE:WLT)

Debt hurts

For example, long-term debt accounted for about 75% of Walter Energy, Inc. (NYSE:WLT)’s capital structure at the end of the second quarter. For comparison, long term debt made up about 55% of industry giant Peabody Energy Corporation (NYSE:BTU)’s capital structure. Clearly, Walter Energy, Inc. (NYSE:WLT) isn’t in as solid a financial position, which helps explain why it had to trim its dividend to a token penny a share and amend a credit facility to improve liquidity.

Walter Energy, Inc. (NYSE:WLT), which focuses on metallurgical coal used in steel making, has been taking aggressive actions to deal with the steep drop in met coal prices. For example, it’s closed or is in the process of closing mines. And it plans to cut full-year 2013 capital spending to about $150 million, less than half of what it spent in 2012. Peabody Energy Corporation (NYSE:BTU) trimmed its budget by a similar amount, but didn’t have to cut its dividend or amend credit facilities.

One expense that didn’t go down for Walter Energy, Inc. (NYSE:WLT) was interest costs. The company paid about $53 million in the first and second quarters. That amounted to 10% of revenues in the first quarter, but because the top line headed lower, 12% in the second quarter. At Peabody Energy Corporation (NYSE:BTU), interest expense was about 6% of sales in both the first and second quarters despite a top line drop.

Walter Energy, Inc. (NYSE:WLT) started the year projecting coal sales of between 11.5 million and 13 million tonnes. It is now projecting just 11 million tonnes, down about 6% year over year. Looking at lower volume and weak pricing, met coal pricing was down over 20% from the year ago period in the second quarter, Walter Energy’s bottom line is likely to be in the red all year.

Page 1 of 2
Loading Comments...