Leading met coal producer and supplier Walter Energy Inc. (WLT) said its operating earnings for the first quarter 2011 came in at $1.53 per share, shy of the Zacks Consensus Estimate of $1.84. However, the company’s earnings more than doubled compared to 77 cents per share earned in the first quarter of 2010.

The impressive year-over-year gain in the quarter resulted from robust revenue growth helped by better coal pricing in the period.

Revenue and Operating Income

Walter Energy’s total revenue of $408.7 million in the first quarter was below the Zacks Consensus Estimate of $415 million. Revenues, however, increased 31% from the year-ago comparable period, mainly due to higher coking coal pricing in the Underground Mining segment.

In the first quarter, Walter Energy’s operating profits totaled $119.8 million, registering an increase of 68% from last year, backed by the solid coal pricing but offset in part by the higher costs and lower sales volumes from the Underground Mining segment. EBITDA for the first quarter 2011 was $148.1 million, up 58% from the first quarter 2010.

Segmental Synopsis

Underground Mining: Total segment’s first-quarter revenue increased 42.8% over last year reaching $343.2 million, while operating income almost doubled to $123.9 million. This solid rise in revenue and operating profit is due to significantly higher coking coal contract pricing offset by lower sales volumes. Operating income was further impacted by higher production costs, royalties and freight costs.

Coking coal volumes sold during the quarter was down 6.4% from the year-ago period at 1.7 million tons, with an average selling price of $193.51 per short ton (up 52.3% from last year). Coking coal production was also down 6% year over year at 1.6 million, resulting from the challenging mining conditions in the first quarter.

The Underground Mining segment sold nearly 3.4 billion cubic feet (Bcf) of natural gas during the first quarter, at an average price of $4.09 per thousand cubic feet (Mcf). This compares to nearly 1.4 Bcf of gas sold in the first quarter of 2010, at an average price of $5.49 per Mcf. Higher sales volumes in the quarter resulted from the company’s Walter Black Warrior Basin natural gas subsidiary acquired in May 2010.

Surface Mining: First quarter revenues of $40.8 million at the Surface Mining segment recorded a 30% growth compared to last year, driven mainly by increased sales volume and pricing. However, higher production costs pushed down the segment’s operating income by 8.2% year over year to $6.7 million.

During the quarter this segment sold nearly 426,000 coal tons, up 13.6%, driven by incremental sales volumes from the Reid School metallurgical coal mine. Segment production was up 7% over last year at 369,000 tons.

Walter Coke: This segment contributed $47.3 million to overall company revenue, representing a year-over-year decline of 7.6%. The decline came mainly from lower sales volumes which more than offset the improved pricing. Operating income for the Walter Coke segment, however, increased 5.3% to $8.0 million on strong pricing and improved plant performance.

Metallurgical coke sales of 104,000 tons in the quarter lagged the 139,000 tons sold in the prior-year period. However, average coke price of $409.85 per ton in the quarter showed an improvement of 25% from last year, driven by better demand in the domestic automotive and steel markets.

Financial Update

As of mid-April 2011, Walter Energy had liquidity of about $500 million, including $169 million in cash, cash equivalents and marketable securities and about $331 million under its credit facility. Total long-term debt was roughly $2,290 million. The company said it has entered a new $2,750 million credit facility simultaneously with the closing of the acquisition of Western Coal on April 1, 2011.

Guidance

Following the closing of Western Coal acquisition on April 1, 2011, Walter Energy is excited about the sales volumes forecasts for both legacy Walter Energy and legacy Western Coal. For the full-year, the company now expects its Alabama underground operations to sell about 7.5 – 8.0 million short tons of met coal, while its Alabama surface operations is expected to sell about 1.4 – 1.6 million short tons of thermal coal.

Walter Energy expects its legacy Western Coal operations to sell between 4.9 – 5.3 million metric tons of met coal for the period of April 1, 2011 to December 31, 2011, while thermal coal sales from these operations is expected in the 1.0 – 1.2 million metric tons range.

Going forward, Walter Energy expects capital expenditures to total about $500 – $540 million for 2011, including significant expansion projects at the Canadian operations.

Our View

With the acquisition of Western Coal now complete, Walter Energy clearly stands to benefit from better production and reserves growth along with the anticipated strength in the global metallurgical coal markets, in our view. Further, the company’s solid guidance explains in itself that the company is all set to make the best use of this opportunity.

Walter Energy’s rival Peabody Energy Corp. (BTU) also reported robust first quarter results, earlier this week, on the back of robust Australian coal prices and U.S. volumes. Walter Energy currently holds a Zacks #1 Rank (short-term Strong Buy rating), faring better than its peer who carries a Zacks #3 Rank (short-term Hold rating).

 
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