Here's Why Walter Energy Isn't Impacted by the Proposed EPA Rules

The large drops by Walter Energy and Alpha Natural Resources following the proposed EPA rules on carbon emissions finally make the stocks look appealing.

Jun 4, 2014 at 10:58AM

The new proposed rules by the Environmental Protection Agency, or EPA, have far reaching impacts on coal used by power plants to produce electricity. It doesn't, however, impact coal used for steel and especially that exported to foreign locations. Based on this news, the large 10% decline by Walter Energy (NASDAQOTH:WLTGQ) is perplexing considering the coal miner is almost completely focused on the metallurgical export market.

With the recently released first-quarter results, the company has plenty of issues outside the EPA. From a China slowdown to an oversupplied metallurgical coal market, the company has plunged to new low after new low. Ironically, the ruling has a greater impact on Peabody Energy (NYSE:BTU) and the majority of stocks in the Market Vectors Coal ETF, which ended up virtually flat the day of the ruling. The reaction is very suggestive of a market overly negative on Walter Energy and fellow met coal leader Alpha Natural Resources (NYSE:ANR) despite the smaller EPA impact.

EPA decision
On June 2, the EPA came out with a proposal to reduce the carbon emissions from the power sector by 30% from the levels achieved in 2005. The mandate is for the reduction in carbon emissions to be met by 2030. The proposal, if approved, will greatly impact power producers focused on coal and the miners that provide that thermal coal.

Leading domestic coal miner Peabody Energy pointed out some issues with the EPA policy. According to the company, coal provided 90% of America's increased electricity needs during the polar vortex winter. In addition, it claims that more than a third of U.S. households qualify for energy assistance. Of course, Peabody Energy is tied to coal demand, but it has some good points on the source of low-cost electricity, calling into doubt whether some of the stricter parts of the proposal will be implemented.

These facts also call into question how the flexible proposals of the EPA will reduce electricity bills by 8% in 2030 if the low-cost source is removed from the equation.

Met coal focused
Of any domestic coal producer, Walter Energy is likely the least affected by the new EPA rules. According to the release by the company, it obtains 95% of revenues from the export of metallurgical coal.

The company projects full year 2014 met coal production to total 9.0 to 10.0 million tons after recently closing the high-cost mines in Canada. The company expects to sell 10.5 and 11.5 million metric tons based on production and nearly 2 million tons in inventory when the first quarter ended. In the last quarter, Walter only produced 174,000 metric tons of thermal coal. At roughly half the selling price of met coal, the thermal position is immaterial to the operations of the company.

Alpha Natural Resources faces more issues from Central Appalachia thermal coal production, which is a prime target of the EPA rules. Outside of that, Alpha Natural Resources is one of the largest met coal producers in the world with vast resources and access to export terminals. Even with the weakness in met coal prices, the company obtained roughly 36% of revenue from the higher valued coal source. It still leaves a substantial amount of revenue potentially affected by the EPA proposals.

Bottom line
When a government proposal impacts a stock more than warranted, it typically provides a buying opportunity. Walter Energy was hit mercilessly despite the limited impact the rules will have on the company. It's always possible that the 645-page EPA proposal contains hidden impacts only noticed by a few sellers, but more likely than not forced selling in the sector automatically dumped weaker stocks such as Walter Energy and Alpha Natural Resources, while buyers moved into the market to buy the stronger miners, such as Peabody Energy. Walter Energy is far from a safe investment, but at this point the market appears irrational on this name.

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 

Mark Holder and Stone Fox Capital clients own shares of Alpha Natural Resources. The Motley Fool has no position in any of the stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers