Who will be the next Patriot Coal?
Patriot Coal was the first major coal producer to go bankrupt in recent times. The then second-largest eastern coal producer after Alpha Natural Resources, Inc. (ANR), Patriot Coal filed for Chapter 11 bankruptcy in July 2012. The reasons cited were rising pension costs and falling coal prices. The company exited bankruptcy in December 2013 as a private company.
In April, James River Coal Company filed for Chapter 11 bankruptcy. Weak outlook for coal has been pulling coal stocks down. Major investment banks including Goldman Sachs Group Inc (GS) and Morgan Stanley (MS) have downgraded coal stocks recently on weak outlook. With recovery nowhere in sight, investors are already talking about which major coal producer will fall next.
In this series, we’ll analyze major coal producers’ debt and liquidity positions, cash burn, probability of default, and credit ratings in an attempt to find out which company will be next.
A very quick look at the industry
The coal industry is going through a rough phase. The shale gas revolution and the US Environmental Protection Agency’s dislike of coal have substantially dented thermal coal’s market share in electricity generation. Thermal coal is expected to lose the battle against natural gas and renewables in the future. Even met coal, which is used in steel production, is marred by global oversupply and changes in China’s economy. China recently reinstated tariffs on imported coal, adding to the gloom.
With oversupply in a low-demand environment, the prices of both met and thermal coal have tumbled to multi-year lows and put pressure on coal producers’ (KOL) finances. Pure-play met coal producers such as Walter Energy, Inc. (WLT) have been the most vulnerable to the oversupply scenario amid competition from Australian met coal producers.
We’ll start our analysis with Walter Energy, the pure-play met coal producer.