On Nov 28, we issued an updated research report on Walter Energy Inc. (WLT). The company is primarily a metallurgical (met) coal producer catering to the global steel industry. Walter Energy’s high quality met coal assets will allow it to capitalize on any improvement in demand in the global met coal markets. However, rising competition in this space, bottleneck in transportation and rising debt levels of the company can offset the aforesaid positives.
Walter Energy reported a loss of $1.58 per share in the third quarter of 2014, narrower than the Zacks Consensus Estimate of a loss of $1.63. However, third-quarter total revenues of $329.5 million lagged the Zacks Consensus Estimate by 2.2%. Revenues were lower than the year-ago quarter by 27.7%, primary due to lower met coal prices, as well as coal sales volume.
However, the World Steel Association projects met coal demand to likely improve 2% in 2014 followed by another 2% improvement in 2015. The demand for steel is likely to be led by the rising automotive, shipbuilding and construction sectors. The improvement in steel production globally is expected to benefit coal exporters like Walter Energy.
However, Walter Energy will face stiff competition from seaborne coal exporters from Australia and Indonesia as they are located nearer to the prime steel-hungry Asian markets. This enables the Australian and Indonesian operators to enjoy lower transportation costs as opposed to U.S.-based companies like Walter Energy.
The rising debt level of the company is also a concern, primarily so because it deals with met coal, unlike its peers that also have thermal coal in their product mix. The company might find it difficult to service its debts going forward, if the supply glut in met coal markets keeps prices subdued.
Walter Energy currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the space include SunCoke Energy (SXC), Natural Resource Partners LP (NRP) and Hallador Energy Company (HNRG). SunCoke Energy sports a Zacks Rank #1 (Strong Buy) while Natural Resource Partners and Hallador Energy have a Zacks Rank #2 (Buy).
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