2 Sides of the Coal Coin to Watch in First Quarter Earnings

Alliance Resource Partners and Walter Energy are on opposite sides of the performance spectrum and the first quarter will prove that.

Apr 24, 2014 at 10:28AM

When it comes to coal miners, only one stands out for good performance: Alliance Resource Partners (NASDAQ:ARLP). At the other end of the spectrum is Walter Energy (NASDAQOTH:WLTGQ), which looks like it's in an increasingly tenuous financial position. That said, first quarter results will be just as important at Alliance as they will be at Walter.

Is this the year of the slowdown?
Alliance Resource Partners posted its 13th year of record results in 2013. Management expects the current year to add to that total. However, there's an interesting trend to watch in those numbers. For example, the high end of Alliance's coal volume sales estimate calls for a 5% increase.

That's not bad, but it's roughly half the increase achieved in 2013. Revenue growth is also expected to be half of what it was in 2013, at around 4% or so. For a coal miner, this is actually rock-star performance right now. But for Alliance Resource Partners, it's a slowing trend.

Investors bid Alliance's shares up some 40% since the start of 2013. The company was, basically, the safe bet in an out of favor sector. When investors rush in like that, however, expectations get elevated, often to unrealistic heights. If 2014 plays out the way Alliance is projecting, investors might be disappointed.

ARLP Chart

ARLP data by YCharts

To be sure, Alliance still has an enviable position in the Illinois Coal Basin, where all but four of its 14 mines live. The area, which is benefiting from a long-term utility coal basin switch, accounts for about 80% of its production. And it's still investing in production, which means long-term growth should continue. But the 2014 pace may not be enough to appease fickle investors. Expect a solid first quarter from Alliance, but pay more attention to the market's reaction.

Surviving to fight another day
Walter Energy, meanwhile, is at the opposite end of the performance spectrum compared to Alliance. The company's shares have fallen over 75% since the start of 2013. Worse, over 80% of the company's coal sales are metallurgical. That sector of the coal market remains out of favor even though there are signs of life in the domestic thermal coal market.

WLT Chart

WLT data by YCharts

In fact, falling met coal prices led to a loss of $5.74 per share in 2013 despite cost cutting and increased sales volumes. While that was an improvement on the nearly $17 a share loss in 2012, Walter can only lose that kind of money for so long before it catches up with the miner. And since met prices are still in the doldrums, the first quarter is likely to be another one of red ink.

That helps explain why Walter just replaced old debt with new, higher interest debt. It also included a PIK provision in some of the debt that allows it to pay bondholders with more debt instead of cash. This is the type of thing you do in preparation for hard times.

All of that said, if Walter can survive this met coal downturn, there's huge upside potential. But only if it survives. So look for 2014 to be another bad year, but aggressive investors may want to keep a close eye on Walter's balance sheet. If it holds up, Walter could be a great turnaround play.

Opposite graphs
The price graphs for Walter and Alliance are complete opposites. However, there may be more risk than you expect in Alliance's shares if investors are expecting too much in 2014 based on the miner's robust 2013 showing. Keep a close eye on the market's reaction to first quarter earnings. Walter appears to be a bankruptcy risk. If it manages to escape that fate, however, Walter's shares could trounce Alliance's over the next few years. Just keep a close eye on the balance sheet, since that's where the story is for this miner.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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