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Westmoreland looks to calm investor concerns after CEO departure

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Westmoreland looks to calm investor concerns after CEO departure

Westmoreland Coal Co. is looking to calm investor concerns after poor quarterly earnings results and the departure of its CEO.

"On our call this morning, the company was adamant they have no reason or need to file for bankruptcy any time soon," Seaport Global Securities LLC analysts Mark Levin and Nathan Martin wrote in a Nov. 28 note.

The coal producer announced Nov. 28 that Kevin Paprzycki was stepping down as CEO, effective immediately, to be temporarily replaced by board member Michael Hutchinson.

Westmoreland reported a net loss of $19.2 million in the third quarter of 2017 and a net loss of $50.5 million in the second quarter. In both quarters, Canadian operations contributed to a drag on its performance.

Two directors, including Paprzycki, resigned in August from the board of Westmoreland Resource Partners LP, its master limited partnership; the coal producer lowered its 2017 guidance the same day, citing challenging conditions.

Analysts from FBR & Co. and Seaport have lowered price targets for Westmoreland in recent weeks, while S&P Global Ratings downgraded its credit rating. Westmoreland's share price has fallen from a 52-week high of $19.92 in December 2016 to $1.31 at market open Nov. 28.

The Seaport analysts said Paprzycki's departure was not a surprise, although many of the company's problems were not his fault. Westmoreland has been trying to sell its Coal Valley operations for some time, and delays in the negotiations have forced it to make additional investments to keep the operation in good shape. Meanwhile, obstacles at Canadian operations included bad operating weather and extended dragline outages.

However, Levin and Martin noted that they spoke to a number of clients who questioned Paprzycki's ability to lead.

In their call with Seaport, the company stressed its strong liquidity position and lack of debt maturity before 2020.

The analysts said the one "make-or-break" event for Westmoreland is its ability to renegotiate an agreement with its master limited partnership's creditors. Westmoreland Resource Partners has a $304 million term loan maturing in December 2018, and while the debt is "non-recourse" to the parent company, investors are concerned that it still might affect Westmoreland.

The MLP's financials for 2017 will likely be audited in the beginning of next year, Levin and Martin said, which could set off a series of events that could force Westmoreland Resource Partners to file for Chapter 11 bankruptcy. Reorganization could catch Westmoreland itself if the MLP is considered a material part of the parent company.

"That's why the stock is acting so poorly, in our view. Regardless, fixing the MLP debt situation is the key. We should know shortly if an agreement can be reached. We are optimistic," Seaport said.

Matthew Preston, research director of North American thermal coal markets for Wood Mackenzie, said a larger long-term issue is that Westmoreland is mostly based on being a captive mine producer.

"The problem is that some of these plants, even though they have low-cost captive mines, are looking to retire, and there is not much to do about that," he told S&P Global Market Intelligence.

"They've tried to market some of that coal, but it's just not in a very good place to do that," he continued.

He noted that in Canada the situation is particularly bad, as the country is looking to shut down many of its coal plants relatively soon.

"The window of opportunity for those mines is very short because of the general direction of the coal industry, of coal-fired power plants in general," he said.

Seaport analysts said they are starting to believe the Coal Valley sale will not occur, but the operation could generate strong free cash flow in 2018 thanks to high Newcastle coal prices.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.