The U.S. Environmental Protection Agency just proposed new regulations for the utility industry that will require a 30% reduction in carbon dioxide emissions. Coal giants like Alpha Natural Resources (NYSE:ANR) watched their shares plummet. However, shares of Walter Energy (NASDAQOTH:WLTGQ) also fell precipitously—even though the regulations won't really hurt the miner's business.
Coal is the bad guy!
The electric utility industry is the largest domestic source of carbon dioxide, accounting for roughly 40% of U.S. CO2 emissions. (To be fair, automobiles are a very close second.) Coal, which supplied roughly 40% of the country's power in 2013, is easily one of the dirtiest fuel options. The simple answer to reaching the EPA's CO2 target, then, is to burn less coal.
That's why Alpha Natural Resources watched its shares fall nearly 4% on the EPA's announcement. It makes complete sense. Alpha's thermal coal operations made up over 50% of its sales last year. Its Eastern thermal business accounted for the lion's share at 42%, with Powder River Basin coal adding another 11%. The rest of the company's top line was derived from metallurgical coal sales.
With roughly half of its businesses reliant on sales of coal to utilities, it's easy to see why investors are concerned. That's doubly true since Alpha Natural Resources has bled red ink for three consecutive years. The cumulative loss over that span is nearly $20 a share.
Coal has been a rough business, and the new EPA regs won't make it any better. That said, the reference date for the improvement was backdated to 2005, which means improvements made over the last nine years will count toward the proposed 30% reduction. Thus, the new rules are far less onerous than they could have been. Still, the trend toward shutting coal fired power plants, the primary customers for thermal coal, will likely continue, not abate.
Walter's on the other side of the fence
The other half of Alpha Natural Resources' business is metallurgical coal, which is used in making steel. That side of the coal market has been particularly difficult of late, too, with supply swamping demand and prices plummeting. For example, the price Alpha got for its met coal fell roughly 12% year over year in the first quarter, and it was a whopping 40% below the pricing achieved at the end of 2011.
So there is a good reason to be concerned about met coal. It isn't strange that Walter Energy's shares are down over 95% since 2011. Why the shares fell over 60% more than Alpha Natural Resources on the EPA news, however, is a mystery; Walter exited 2013 with met coal accounting for 85% of its sales.
In fact, Walter Energy actually calls itself a "pure play" met miner (Walter Energy puts the words in quotes.) Thermal coal is really just an afterthought. The company even put out a press release explaining this fairly material fact: "Because the rules issued today by EPA are aimed at controlling CO2 emissions from existing domestic power plants, we do not expect the regulation will have any material impact on Walter Energy."
Walter Energy's news release goes on to say, "We primarily mine and sell metallurgical grades of coal that are used in making steel, not generating electricity. Approximately 95% of the company's coal-related revenues come from the export of metallurgical coal." Of course, that helps explain why the coal miner's shares are down so much over the last few years. Walter's first quarter met pricing was down roughly 16% year over year, and like Alpha Natural Resources, even more since 2011.
Don't jump now...
The EPA rules are a moot point at Walter, and that's important for you to remember when examining the coal space. However, that doesn't mean the miner is a mispriced buying opportunity. Sure, Walter Energy got thrown out with the bathwater, but it still has big problems ahead of it in the met space. You should probably steer clear for now.
Reuben Brewer 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.