Walter Energy Beats, Profit Plunges

Zacks

Metallurgical coal producer Walter Energy Inc.’s (WLT) operating earnings per share in the second quarter of 2012 were 43 cents versus $1.83 reported in the year-ago quarter. Earnings were higher than the Zacks Consensus Estimate of 39 cents.

Revenue

Walter Energy’s total revenue of $678.0 million in the second quarter was lower than $771 million reported in the year-ago period.

Despite an expansion in coal sales volumes, the top line declined over the prior year due primarily to lower realized prices of all varieties of coal sold by the company.

However, the top line was higher than the Zacks Consensus Estimate of $669 million.

Sales and Production

During the quarter, Walter Energy’s metallurgical coal production reached 2.91 million metric tons (MMTs), increasing by 17% from the year-ago quarter. The production consists of 75% met coal and 25% pulverized coal injection (PCI) coal.

Sales volume during the reported quarter touched 2.84 MMTs comprising 2.29 MMT of HCC and the balance PCI.

Operational Update

Second quarter operating profit at Walter Energy totaled $67.9 million, down sharply 59.9% from the same period last year, due to operating losses incurred at its Canadian and UK operations and increase in the cash cost per ton of coal.

Interest expenses were $31.1 million versus $32.1 million in the prior-year quarter.

Financial Update

The company continues to maintain a healthy cash balance. Cash and cash equivalents as of June 30, 2012 were $128.7 million versus $128.4 million as of December 31, 2011.

Long-term debt decreased marginally from the year-end level. Long-term debt as of June 30, 2012 was $2.20 billion versus $2.27 billion as of December 31, 2011.

In the second quarter, capital expenditure was $125.2 million compared with $92.1 million in the year-ago quarter. The increase was mainly due to higher spends on its global operations with the major chunk being invested for the development of its Canadian and UK operations.

Cash from operating activities during the first half of 2012 was $308.6 million versus $279.4 million in the year-ago period.

Guidance

Walter Energy maintained its total coal production guidance for 2012 in the band of 11.5–13 MMTs. Out the total production 75% to 80% will constitute of the HCC variant and the balance will be the low-vol PCI coal.

Keeping in mind the sluggish growth in the global economy, the company has decided to lower its capital expenditure for 2012 by $100 million to $400 million.

Peer Comparison

Arch Coal, Inc. (ACI), which competes with Walter Energy, reported pro forma loss of 10 cents per share for the second quarter of 2012 versus earnings of 44 cents per share in the year-ago comparable period. The reported loss was, however, narrower than the Zacks Consensus Estimate of a loss of 18 cents per share.

Arch's total revenue of $1,063.5 million in the second quarter 2012 surpassed the Zacks Consensus Estimate of $1,020 million and the year-ago revenue of $985.5 million.

Our view

Despite registering year-over-year growth in production and sales volume during the reported quarter, the company remains skeptical about engaging in capital expansion projects. This is reflected in its cut capex guidance.

Losses incurred at the UK and Canadian operations continue to hurt the company. Nevertheless, the gradual improvement expected in global steel production will stand to benefit the company. China, a major producer of steel, has recently approved steel projects worth $23 billion. With this, the demand for seaborne metallurgical coal would see a huge boost.

Birmingham, Alabama-based Walter Energy is one of the leading US producers and exporters of premium met coal catering to the global steel industry. Walter Energy currently retains a Zacks #3 Rank which translates into a short-term Hold rating.

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