Arch Coal Inc (ACI), Walter Energy, Inc. (WLT): The Future Is Still Uncertain for Coal

U.S. coal companies have been going through hard times since April 2011. Both met and thermal coal producers have lost significant amounts of their market capitalization in recent times. The reasons behind the downturn in the coal industry are primarily the economic crisis in Europe and lower natural gas prices in the U.S. as a result of the shale gas boom. It hasn’t been more than two years since coal companies began losing their stock prices, and the process is still ongoing. The following table shows the losses in the coal industry since the beginning of 2013.

Arch Coal Inc (NYSE:ACI)

  Year to date (2013*)
Arch Coal Inc (NYSE:ACI -35%
Walter Energy, Inc. (NYSE:WLT -60%
Alpha Natural Resources  -35%
Peabody Energy  -29%
Market Vector Coal  -20%

Source: Google finance

Tough times for coal industry
 Market Vectors-Coal ETF (NYSEMKT:KOL) is likely to underperform the broad market in the near future, as the coal industry continues to face pressures.

Thermal coal markets were already weak, but lately it seems that met coal markets are also losing ground. Met coal prices and market conditions remain feeble as we move through the second half of 2013. In addition to the Euro crisis, the Chinese and Indian economies have also started showing signs of a slowdown, which adds to the pressures faced by the coal industry, especially by met coal producers. The met coal benchmark contract fell to $145 per metric ton for the third quarter of 2013, as compared to $172 metric ton in 2Q 2013. Market consensus is building up that the met coal benchmark price for the fourth quarter will stay weak and will settle around $150 per metric ton.

Walter Energy, Inc. (NYSE:WLT) is likely to suffer the most from weak met coal market conditions, as it has significant exposure to met coal operations. Given that weak met coal conditions prevail, Walter Energy, Inc. (NYSE:WLT) may witness a further drop in its stock price. As a result of the 60% drop it has already experienced, Walter Energy, Inc. (NYSE:WLT)’s debt-to-equity ratio has increased to 285%, which remains a risk for investors. To improve upon its financial flexibility and survive the prevalent weakness in coal markets, Walter Energy, Inc. (NYSE:WLT) secured a credit amendment and declared a dividend cut of 92%. The credit amendment, which Walter Energy, Inc. (NYSE:WLT) secured earlier this quarter, provides the company some financial flexibility through 2015, as the amendment suspends the senior leverage ratio covenant and the interest coverage ratio covenant till June 2014 and March 2015, respectively .