Patriot Revises Outlook


Patriot Coal Corporation (PCX) decided to lower its sales outlook for the remainder of 2012 and for 2013 as one of its prime customers has failed to meet a purchase obligation. With the changed scenario, the company now expects to sell 3.9 million tons of Appalachia – metallurgical (met) coal at $142 per ton in the remainder of 2012 and 0.2 million tons of met coal at $122 per ton in 2013.

The current estimates are down from the earlier guidance provided by the company during the first quarter earnings call. Patriot had projected Appalachia – met coal sales for the remainder of 2012 to be 4.9 million tons at $138 per ton, while 2013 sales were expected to be 0.4 million tons at $120 per ton.

Like other major coal producers, Patriot Coal too generates a substantial portion of its sales revenue from long-term agreements with its customers. In 2011, 78% of the total coal sales of the company were derived from long-term contracts. This trend is expected to continue as we go ahead.

The guidance provided by the company takes into consideration the volumes to be delivered under the legacy contracts at pre-determined prices. It also incorporates the possibility of renegotiation or renewal of contracts on favorable terms upon expiry. If the company fails to renegotiate a contract or a customer does not comply with its commitments, the total sales volume would miss the mark.

It is worth noting that in case of a customer failing to fulfill a commitment and the company being able to sell off the excess volume in the spot market, the coal producer would still book lower profits. At present spot market prices are roughly $25 to $30 per ton lower than the original contracted price.

First Quarter Recap

The company reported a loss of 82 cents per share in the first quarter of 2012 compared with a loss of 17 cents per share in the year-ago quarter. The wider loss during the quarter was mainly due to a decline in tons sold owing to lower coal demand, and higher impairment and restructuring expenses.

Given the softer market demand for coal in 2012, we believe it will be difficult for the company to compensate for the reduction in the projected sales volume. Besides, plummeting natural gas prices will also impact the demand for coal.

Patriot Coal Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Another prime coal producer Arch Coal Inc. (ACI) also retains a Zacks #3 Rank. Arch Coal had a soft first quarter, just like Patriot, due to increasing competition from natural gas and weak U.S. coal consumption because of a much milder winter.

St. Louis, Missouri-based Patriot Coal Corporation is a coal producer and marketer in eastern United States, operating 13 mining complexes in Appalachia and the Illinois Basin.

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