Thursday, July 31, 2014

Walter Energy Execs Claim their Equity is Underpriced! $WLT

Great question from the conference call today, and fascinating answer:

Q: Bill, I think you mentioned further levers earlier and I know you received a few follow-ups on that, but I wondered if this could maybe also include some kind of equity for debt swaps as you had done earlier this year?

A: I think as we mentioned on the last call if you remember, that we do believe our equity's undervalued right now. And - but at the same point we're not ruling anything out but it's not really part of - debt to equity swaps has never been a - not a program by any means, it's simply when - if a debt holder phones us we'll listen and we'll see if it makes sense. We do like the fact it lowers interest expense marginally, and that's good, but there is a cost to it, the equity component. So we're not ruling anything out but you shouldn't expect any big program.
Incredible. Their annual interest expense is closing in on 1x their market cap, it's already >1x their cash on hand - and they have a negative free cash flow business. The bonds are yielding 25 percent now. How can they think that the stock is undervalued relative to the bonds?

The other amazing thing is that management isn't buying the undervalued stock - although employees like CEO Walter Scheller (proxy) have been given a fair amount of their compensation in the form of restricted stock and stock options. In the past, he has gotten an equity package "valued at 150% of his annual base salary, based on the Black-Scholes value at the date of grant, 50% of which was to be in the form of non-qualified stock options and 50% of which was to be in the form of restricted stock units".

So, by "undervalued," he seems to mean "not cheap enough for me to want to buy with cash, but which has declined enough that I am now mentally anchored on the share price when the met coal market was much more favorable."

In my experience, management that won't use a $378 million market cap as a currency to retire debt trading in the 50s is going to crash the plane into the mountain with full afterburners on. We must govern ourselves accordingly.


Josh H said...

It seems obvious that WLT stock is a 0 without doing more debt for equity swaps. You have done a great job covering the name. Thank you.

Let's just 'believe' that mgmt actually believes their stock is undervalued at 6. Some of the debt is trading at 50c on the dollar, why not swap it at 60c (a premium to get holders to swap).

This type of logic then says that equity is getting $10 worth of value.

Anonymous said...

Stock is up huge today, crazy.

Anonymous said...

Imperial Capital estimate yesterday was that WLT would need $170 met coal for equity to be in the money.

Josh H said...

Short term these stocks can bounce. I will be the first to acknowledge that. I can understand trading it from the long side, but I wouldn't be invested long term in one of these weak names WLT, ANR, ACI. Plus if you can loan out, you might make some money on that. WLT borrow rate is 25% according to IB.

If I was going to be long for a turnaround, I would be long BTU where I can see them surviving. People are paying for beta for stocks like WLT.

CP said...

Right those three are the worst names and PRB coal will survive.

Anonymous said...

This turned out to be a good prediction.

Josh H said...

So bad BTU and CLD are struggling. Too much nat gas production out there. Winter was just as cold as the 5 year average, surprised nat gas prices did not hold up better. We will see in the next few months how fast nat gas (and oil) production slows down. That will be the key, otherwise coal will continue to struggle.

I never got short WLT in a big way because of the borrow cost. If I had known it would go down that fast I would have. I was surprised how fast it dropped.