Patriot Coal (PCXCQ) is using bankruptcy protection to get its house in order. Now that it's getting ready to exit that protective cushion, its competitors and partners are breathing a little easier. Here's why you should, too.
The origin of a miner
Patriot Coal was spun off from Peabody Energy (NYSE: BTU ) in late 2007. At that time, Peabody Energy said shareholders "...will retain ownership in the world's largest coal company and obtain ownership in a leading Eastern U.S. producer with a major metallurgical and steam coal position." Further, Peabody noted that it would continue to transform its business by increasing its U.S. presence in the Western United States (essentially the Powder River Basin) and in the Illinois Basin.
What wasn't said, but could easily be inferred, is that the assets Peabody Energy spun off into Patriot were businesses it didn't like. And along with those went material obligations to employees and former employees. Unions have argued that this transaction was intended solely to jettison those obligations. So when Patriot sought out bankruptcy protection, Peabody was almost immediately dragged into the fight.
Not to be left out...
Arch Coal (NASDAQOTH: ACIIQ ) also found itself caught up in the mix, since Patriot acquired Magnum Coal the year after it was spun off. Magnum owned a series of mines, and the associated employee obligations, that used to belong to Arch Coal. Thus, these two coal giants have been operating under a cloud of uncertainty because of the Patriot bankruptcy.
And the courtroom drama has been unfolding at a time when the entire industry is struggling. Arch Coal, for example, has bled red ink in four of the last five quarters. The second half will probably see losses on the bottom line, as well. Peabody Energy has done better, losing money in only two of the last five quarters. However, its third quarter outlook calls for earnings to fall between a loss of $0.16 a share and a gain of $0.09. The fourth quarter probably won't be much better.
Getting past it
Clearly, this is a tough time to be dragged into another company's bankruptcy. That's why they've been happy to talk. And, now that those talks have led to an agreement, Patriot is getting ready to exit bankruptcy. Although Peabody Energy and Arch Coal are on the hook for hundreds of millions of dollars, the bulk of which is coming from Peabody Energy, the pair can now get rid of the extra legal expenses and distraction. That won't alter the coal market's outlook, but it's an important milestone for all three.
And they aren't the only ones that can breath a sigh of relief. For example, Rhino Resource Partners' (NASDAQOTH: RHNO ) Eastern Met division is "comprised solely of a joint venture with Patriot Coal Corporation." Although production in that division is down over 50% so far this year and it's losing money, it contributed notably to performance in 2012. Now that Patriot looks likely to exit bankruptcy later this year, Rhino can worry a little less about its partner. And when metallurgical coal markets improve, the division can start adding to performance again without any lingering concerns.
Natural Resource Partners (NYSE: NRP ) is also likely to be pleased by Patriot's pending exit from bankruptcy. Natural Resources leases its coal mines to others, including Patriot, and collects royalties. Patriot was involved at two mines, partnering with Arch at one and as the primary lessee at another. It's reassuring to know that the companies working your mines are going concerns.
A big splash
The news that Patriot was entering bankruptcy was big. Not only did it effect Patriot, but it also hit Peabody Energy, Arch Coal, Rhino Resource Partners, and Natural Resource Partners. All four of the companies, and their shareholders, can breath a little easier now that Patriot looks to be righting itself.
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