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Westmoreland Coal Is A Unique Opportunity

Summary

  • Westmoreland Coal's entry into the MLP space signals a new direction for the company.

  • The MLP is perfectly suited to Westmoreland Coal, and we should expect additional asset drop-downs.

  • Expect other coal companies to try to raise capital through all available methods if coal prices stay low.

  • Many coal companies could benefit from the MLP structure although none are currently as well-suited as Westmoreland for the transition.

  • Peabody Energy is the best potential candidate for MLP usage.

Westmoreland Coal (NASDAQ:WLB) is an almost forgotten player in a distinctly distressed industry. It's also uniquely positioned with a business model that offers significant benefits in the industry's current environment. Westmoreland's purchase of a controlling interest (77%) in Oxford Resource Partners (NYSE:OXF), a Master Limited Partnership (MLP), on October 16th is a game-changer for both companies. This deal, which should be finalized in 4Q14, may lead other coal producers to investigate similar transactions. No other coal miner is as well-positioned for entry into the MLP space, though.

 

Westmoreland primarily utilizes a mine-to-mouth business model. This model is centered on mines delivering fuel to nearby power plants. These plants are specifically designed to use the supplying mine's thermal coal. Some mines feed coal directly into a single customer's power plant via a conveyor belt. Other Westmoreland mines have multiple customers, with one power plant typically adjacent to the mine. Ten of Westmoreland's twelve mines fit into this business model.

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