Walter Energy Files for Bankruptcy: What Investors Should Know

(Continued from Prior Part)

As we discussed in the previous part, Walter Energy traded under a dollar for more than a quarter until trading was suspended on the NYSE on July 8. The seeds of the fall were sowed back in 2011. Walter Energy filed for Chapter 11 bankruptcy on July 15, 2015.

On April 1, 2011, Walter Energy (WLTG) announced the completion of its acquisition of Western Coal Corp., a Canadian met coal producer. Walter Energy paid $2.1 billion in cash to acquire Western Coal Corporation in addition to $1.2 billion in Walter Energy shares. The acquisition gave Walter Energy access to 136 million tons of met coal reserves in British Columbia, Canada. Much of the cash component of the acquisition was funded by debt, leveraging Walter Energy’s balance sheet.

The 2011 floods in Queensland, Australia, caused a global shortage of metallurgical coal. Benchmark met coal prices scaled up to $330 a ton in April 2011. China’s GDP grew at 9.7% in 1Q11. China is the biggest consumer of met coal in the world and accounts for half of the world’s total steel production.

Hoping for the rally in coal prices and for China’s GDP to continue to climb, Walter Energy (WLT) and its peers—including Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU)—splurged on overpriced acquisitions. Only a handful of large coal (KOL) companies, including Cloud Peak Energy (CLD) and Alliance Resource Partners (ARLP), refrained from acquiring coal assets.

When other coal producers were busy acquiring coal assets, Consol Energy (CNX) pushed into natural gas production, which helped the company diversify its commodity risk and get into natural gas production. The bet paid off. Natural gas recently surpassed coal’s market share in electricity generation.

Met coal prices started falling a few quarters later as Australian production for the commodity resumed. At the same time, concerns regarding China’s growth emerged. Benchmark met coal prices have fallen from $330 a ton in 1Q11 to just $93 a ton in the current quarter.

While other US coal producers such as Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU) also felt the heat, Walter Energy (WLT) was the biggest casualty, being a pure-play met coal producer.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Walter Energy Is Preparing for Chapter 11 Bankruptcy
• Part 2 - NYSE Suspends Trading of Walter Energy Stock
• Part 4 - How China Led to Walter Energy’s Fall