Alpha Natural Resources, Inc. (ANR), Walter Energy, Inc. (WLT): 2 Coal Stocks to Avoid

Alpha Natural Resources, Inc. (NYSE:ANR) has been working to counter the negative impact of weak coal market conditions. The company has done a decent task by focusing on high margin met and thermal coal assets and improving its cost structure following its Massey Energy acquisition in 2011. The factors that can positively impact the company’s performance are improved met coal demand and prices and cost control initiatives.

Walter Energy, Inc. (NYSE:WLT) is another coal stock with significant exposure to met coal. A weak met coal market has been an important reason behind the drop in price. However, other than weak market conditions, the significant drop in price of Walter is attributed to its highly leveraged balance sheet. Last month, Walter Energy, Inc. (NYSE:WLT) stepped back from a $1.55 billion debt refinancing plan. The announcement was negatively taken by the investors and the stock price fell.

In an effort to comply with debt covenants, the company is in search of modification of its debt agreement and covenants, which will be accompanied by additional conditions by the lenders. Due to Walter Energy, Inc. (NYSE:WLT)’s ongoing liquidity and refinancing concerns, S&P and Moody’s downgraded the credit rating assigned to the company. As Walter is surrounded by weak market conditions and liquidity concerns, this can lead to a further drop in stock price.

Final words

As met coal prices and demand remains weak, I believe met coal stocks will underperform thermal coal stocks. Concerns over global economic growth outlook, increased met coal production by Australia, and lower Chinese imports are the reasons that can lead to underperformance by met coal stocks. Moreover, concerns related to financial strength of coal companies, such as Walter Energy, remain a headwind for potential price appreciation.

Therefore, I remain bearish on Alpha Natural and Walter Energy, Inc. (NYSE:WLT). Positive global economic outlook and improved cost structures are the factors that can be positive for the companies’ stock price.

The article 2 Coal Stocks to Avoid originally appeared on Fool.com and is written by Faizan Chudhry.

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