Will Walter Energy survive the downturn?
Walter Energy (WLT) has been burning cash continuously for the past several quarters. The cash burn has forced the company to refinance the term loan with high cost notes. The move has simply extended the lifeline at the cost of higher interest expenses going forward. The company now has no major repayment obligation until 2018.
While the refinancing was possible in this case, the possibility of refinancing the maturing 2018 obligation will be weak given the recent downgrade by rating agencies. Also, if the company keeps burning cash for the next few quarters, the financial position of the company will deteriorate leading to the possibility of further downgrades.
One positive thing about the company during the quarter was that it has finally responded, or was forced to respond, to current oversupply in the metallurgical coal market by idling Canadian operations. The move along with similar initiatives, although “active” ones, taken by peers (KOL) such as Peabody Energy (BTU), Alpha Natural Resources (ANR), and Arch Coal (ACI) will help curb oversupply in the industry and may support metallurgical coal prices.
The company derives the majority of its revenues from exports to Europe and Asia. The Chinese purchasing managers’ index (or PMI) clocked a reading of 51.7 in July compared to 51 in June. Since PMI is considered to be an indication for the economy, a better reading translates to better days ahead for the economy and in turn fuel demand for steel. Metallurgical coal is used in steel production, which will make the metallurgical coal demand increase as well.
Will Walter Energy survive?
The answer to the question largely depends on two factors—the trajectory of met coal price and the met coal production in Australia. Right now, the met coal game seems to be the one in which everybody is burning cash hoping for good days ahead. Among its peers, Walter Energy is clearly at a disadvantage due to its “pure-play met coal producer” tag. However, it has bought time until 2018 through refinancing. The concern is whether the current liquidity with the company will last until 2018 or will the company be able to refinance in 2018 if met coal prices remain subdued.
Read the Market Realist’s Coal page to learn more about this important industry.