2 Charts That Explain Walter Energy’s Problems

These two charts will explain the situation that Walter Energy faces.

Jun 11, 2014 at 12:33PM

Walter Energy (NASDAQOTH:WLTGQ) is experiencing tough times as it keeps cutting its production guidance and faces lower metallurgical coal prices. Other coal companies such as Arch Coal (NYSE:ACI) and Alpha Natural Resources (NYSE:ANR) face similar market conditions, but their situation isn't as dire as Walter Energy's. Here are two charts that illustrate Walter Energy's situation compared to its peers.

Production continues to dwindle
Walter Energy expects a decline in its coal sales from 12.6 million metric tons of coal in 2013 to nearly 11 mmt in 2014 -- a 13% fall. Most of this drop is due to an expected 18% plunge in metallurgical coal production.

In comparison, Arch Coal sold 139.6 million tons of coal during 2013, and this year the company expects to sell around 135 million tons -- only a 3.3% decline. The chart below shows the changes in coal sales in 2013 and the expected drop in sales in 2014, year over year.

Walter Change In Sales

Source: Arch  Coal  and Walter  Energy  websites.

Keep in mind, however, that Walter Energy mostly sells metallurgical coal (roughly 90% of its coal output), which is mostly used to smelt iron ore. Meanwhile, Arch Coal's metallurgical coal business accounts for only 5% of its total coal volume -- most of its operations are in thermal coal. Alpha Natural Resources is in the middle of the pack, as met coal accounts for roughly 50% of its volume of coal produced. Since metallurgical coal prices took a much harder hit than thermal coal, the current market conditions are much harsher for Walter Energy than they are for Arch Coal or Alpha Natural Resources.

High debt
The low coal prices and drop in production only raises the risk for coal companies to accumulate greater debt, as indicated in the following chart. It shows the debt-to-equity ratio of the above-mentioned coal companies.

Walter Debt

Source: Google Finance

As you can see, Walter Energy's level of debt is much higher than its peers. This puts the company at a higher financial risk.

Silver lining -- lower cost of production
Despite the problems Walter Energy faces, its management has made great strides toward reducing costs including production and SG&A.

Last year, the company's SG&A dropped to $100 million -- 25% lower than in 2012. Moreover, in the first quarter, its SG&A provision fell by 33%, year over year.

In terms of production costs, the company expects to see a further decline in this provision during the year. During the first quarter, its met coal cash cost of production dropped by 23% year over year. These cost reductions are likely to ease the rise in its debt.

Takeaway
The ongoing weakness in the met coal market and expected drop in Walter Energy's production are likely to keep this company's operational risk high. Its high burden of debt compared to other coal companies will also continue to steer investors away from its stock.

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Lior Cohen has no position in any stocks mentioned. 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.

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