BANGALORE - Patriot Coal Corp has been striving to allay investor concerns over a potential covenant breach and contract deferrals in the wake of dwindling demand that sent its stock crashing to a life-low in March.
However, the third largest eastern U.S. coal producer appears to have turned the tide, with its stock almost doubling to $10.28 after the company swung to a first-quarter net profit and fears of a liquidity crunch were partially mitigated.
The company has announced a slew of cost-cutting measures, which included curtailing production and reducing salary. Nonetheless, Patriot has not overruled the risk of future contract deferrals.
Should investors take a long position on the stock while it is in recovery mode, or is it time to sell?
PRICING CONCERNS GAIN
The stock has run significantly and I expect the near term performance to be moderate. I don't expect to see the same move again until a pricing recovery is confirmed, Shneur Gershuni, an analyst at UBS, said by phone.
Infact, earnings are going to be down in 2010, versus 2009, with acceleration in 2011, he added.
What we need to see is production get to a level that is below the decline in generation. Despite updating for all the production costs, we just don't see that inflection point until the third quarter, Gershuni said.
We remain 'sell'-rated primarily due to its weak earnings power relative to peers. Patriot's earnings remain constrained by low contracted prices relative to Appalachian producers, Goldman Sachs analyst Brian Singer wrote in a note to clients.
LIQUIDITY CONCERNS EASE
Major credit and liquidity concerns are now mostly behind the company, Citigroup analyst Brian Yu said in a recent note.
The improved liquidity position has to do with the company scaling back their capex budget by approximately $25 million... they ended the first quarter with available credit of $92 million under their revolver versus prior guidance of $26 million to $51 million, he said in a reply to an email seeking details.
While we expect Patriot Coal to post a steep operating loss of $1.83 in 2009, earnings should improve in 2010 to positive $0.45 as older (lower priced) thermal contracts expire, he said.
Barclays analyst Peter Ward agrees. We expect the company's liquidity position to improve through the year, he wrote in a note. While we believe that Patriot's shares are high-risk, the potential upside makes the risk/reward attractive, he added. Shares of the company, spun off by Peabody Energy Corp (BTU.N) in October 2007, were trading up 6 percent at $8.75 on the New York Stock Exchange. (Editing by Jarshad Kakkrakandy)