WestmorelandCoal Co., one of the few remaining publicly traded coal companies,could have some bad news for investors when it releases earnings on Aug. 2.
According to an S&P Global Market Intelligence analysisof U.S. Mine Safety and Health Administration data, second-quarter coalproduction at Westmoreland's U.S. coal operations is down 39.4% from theprevious quarter. The company's U.S. coal mines reported coal production at 5.2million tons in the recent quarter, compared to 8.5 million in prior quarterand 9.2 million tons from the same mines in the year-ago second quarter.
In a first-quarter earnings call, Westmoreland CEO KevinPaprzycki said the second quarter is usually weaker due to reduced power demandthat generally picks up in the third and fourth quarters.
Westmoreland's most productive mine, Rosebud, cut production36.7% from the first quarter to 1.4 million tons of coal in the second of 2016.The mine serves the Colstrip power plant owned by Talen EnergyCorp's Talen Generation LLC, subsidiary Puget Sound Energy Inc., , , and subsidiary .
The companies that own Colstrip recently reached adeal to retire twoolder coal units at the plant on or before July 2022.
Other large Westmoreland mines made significant cuts betweenthe first and second quarter as well. The San Juan mine sliced production 72.7%to 444,852 tons, and the Absaloka mine cut production 45.4% to 590,138 tons.
In the coal space, Westmoreland has generally enjoyed positivesentiment. Last year, BMO Capital Markets analyst David Gagliano Westmoreland as a"different 'coal' company." In that Aug. 31, 2015, note, Gaglianorated Westmoreland "outperform" and said Westmoreland was an"investable" coal company because it has a unique business modelpredicated on mine-mouth operations and a cost pass-through model. However, healso noted that Westmoreland was not immune to long-term risk and carries afairly significant amount of debt.
Gagliano reiterated an "outperform" rating forWestmoreland on May 10. FBR & Co. analyst Lucas Pipes also rated thecompany "outperform" in a May 11 note, noting the company's contractshave an average remaining life of 10 years.
"The company's mine-mouth generates some of the lowestdelivered costs for coal in the U.S.," Pipes wrote. "Furthermore,many of the (largely baseload) plants supplied were built adjacent to or on topof the mines themselves and engineered to take each mine's specific coal. Thisstructure supportsWestmoreland s long-term supply agreements, which are largely based on acost-plus model."
According to S&P Capital IQ data, the company had a netdebt to EBITDA ratio of 5.2x as of the first-quarter of 2016. At an industryconference in early2015, ahead of a wave of major coal sector bankruptcies led by those with highnet debt to EBITDA ratios, BB&T Capital Markets analyst Mark Levin warnedinvestors should be wary of a commodity cyclical company if its net debt toEBITDA ratio is over 3x to 4x.
Moody's in February gave Westmoreland a credit rating ofCaa1 with a "stable" outlook. S&P Global Ratings gaveWestmoreland a "negative" outlook with a long-term rating of"B" on March 28.
Westmoreland stock was trading at $9.66 per share as of 9:56a.m. on July 22. Westmoreland's master-limited partnership, , wastrading at $5.95 per share as of 9:49 a.m. on July 22.
In the first quarter, Westmoreland reported revenues fromits U.S. coal division of $155.2 million from coal sales of 6.0 million tons.It reported revenue of $92.5 million from 2.0 million tons of coal sold fromits master limited partnership's coal operations.
Westmoreland's Canadian coal operations, for whichsecond-quarter production data is not available, earned $93.4 million from 5.8million tons of coal sold in the first quarter of 2016.
An official for Westmoreland did not respond to a requestfor comment.
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