Walter Energy (NYSE:WLT) is a source of never-ending pain for its investors. The stock has lost 68% this year. When it seemed like all the bad news was issued, more bad news came.
Can Walter Energy survive this tornado? Let’s take a look.
Source of the problems
Walter Energy, Inc. (NYSE:WLT) is a metallurgical (met) coal producer. Met coal prices have been under tremendous pressure. At current price levels, company is not able to become profitable despite all of its cost-cutting measures. The situation is deteriorating fast, and so is the stock price. Just 90 days ago Walter energy was expected to lose $0.79 per share this year. Now it is expected to lose $2.01 per share. Estimates for 2014 have been slashed by 98%, although they remain positive.
At the beginning of June, the company has announced that it was exploring options to refinance a portion of its existing debt. Walter Energy, Inc. (NYSE:WLT), which has a huge 2.76 debt-to-equity ratio, wanted to replace existing debt with debt that would mature further in the future. If this move were successful, it would have postponed possible liquidity problems.
Then things went the wrong way, and soon Walter Energy has announced that it is not going to proceed with refinancing. What does it mean for investors? The company explored the options and found that it cannot get acceptable terms. On the same day when Walter Energy released its refinancing intentions, Moody’s have downgraded its rating on Walter Energy with a negative outlook. It is highly possible that Walter Energy found that investors are ready to buy bonds that yield more than 10% and found such rates unacceptable.
More wood to the fire
At the beginning of June, Raymond James has cut its 2013-2014 met coal price forecast and downgraded Walter Energy, Inc. (NYSE:WLT), Arch Coal Inc (NYSE:ACI), Alpha Natural Resources, Inc. (NYSE:ANR) and Peabody Energy Corporation (NYSE:BTU). This move was met by analysts at Morgan Stanley, who stated that Walter Energy is too tempting to ignore. They said the stock could trade as high as $35.
This was probably the only bright point for Walter Energy, Inc. (NYSE:WLT). The latest statistics from China show that steel production in late May was down 4.7% compared to mid-May. Given that met coal is used for steel production, this is bad news.
In addition to that, US coal shipments fell 31% in April from the prior month. The main cause was the oversupply in Asia. The combination of this news was troubling for other coal stocks, and they accelerated their decline. Arch Coal Inc (NYSE:ACI) is down 48% this year, Alpha Natural Resources, Inc. (NYSE:ANR) is down 47% and Peabody Energy Corporation (NYSE:BTU) is off 43%.
As if all of the above mentioned was not enough for Walter Energy, Standard & Poor’s has placed all existing ratings on the company on CreditWatch with negative implications. The firm stated that Walter Energy was not able to refinance its debt and it raises concerns about the company’s liquidity.
The main concern
The most important topic in coal industry now is liquidity. If a company has enough cash, it can wait for coal prices to rise and survive the storm. Walter Energy, Inc. (NYSE:WLT) had $235.7 million of cash and cash equivalents on its balance sheet at the end of the first quarter.
Alpha Natural Resources has stepped in and said it is confident in its liquidity position. The company would have to meet $417 million in debt obligations due in 2015. Alpha Natural Resources said it is not planning to issue more equity, stating it would have been a bad decision at current prices.