Key investor takeaways from Walter Energy's 1Q14 earnings

Part 4
Key investor takeaways from Walter Energy's 1Q14 earnings (Part 4 of 8)

Why Walter Energy’s sales are trailing its falling production

Production and guidance

On a company level, shipment is one of the key drivers of revenue and earnings. In 2013, Walter Energy sold 10,414 thousand metric tonnes of metallurgical coal, producing 11,172 thousand metric tonnes. During the first quarter of 2014, the company produced a solid amount of 3,125 thousand metric tonnes, while shipments totaled just 2,609 thousand metric tonnes. Sales were negatively affected by the timing of a 190,000-tonne vessel that shipped during the first few days of April that wasn’t reported in first quarter results.

Walter Energy Metallurgical Coal ShipmentsEnlarge Graph

In the company’s first quarter earnings release, management provided production guidance of between 9,000 thousand and 10,000 thousand metric tonnes and sales of between 10,500 thousand and 11,500 thousand metric tonnes for 2014. While shipments are more or less in line with 2013 sales, production will be lower in 2014 as the company idles its operations in Canada.

Acquisition

Walter Energy’s Canadian assets were purchased back on April 1, 2011, as part of Western Coal Corp. acquisition. The company’s 2011 acquisition had helped fuel its metallurgical coal production from ~1,800 thousand metric tonnes per quarter in 2011 to ~2,500 per quarter in 2013, but at a pretty expensive valuation, looking back.

At that time, Walter Energy had acquired Western Coal for a $3.3 billion valuation using cash and shares—a multiple of what Walter Energy is currently valued at in the market today, ~$430 million. Note that almost every other U.S. publicly traded coal company, including Peabody Energy (BTU), Consol Energy (CNX), Arch Coal (ACI), and Alpha Natural (ANR), went on an acquisition spree in 2010 or 2011, only having to reduce the value of the assets later on when the coal market peaked and the Market Vectors Coal ETF (KOL) rolled over.

If an industry is going on a massive acquisition spree, it’s a good idea to be cautious.

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