Patriot Coal Filed Chapter 11 Last Week, Here's How The Rest Of The Industry Looks

Coal

Photo: cypheroz via flickr

Last week, Patriot Coal filed for chapter 11 bankruptcy protection.”The coal industry is undergoing a major transformation and Patriot’s existing capital structure prevents it from making the necessary adjustments to achieve long-term success,” said Patriot Coal CEO Irl Engelhardt.

This left investors wondering about the rest of the industry.

BMO Capital analyst Meredith Bandy tackled this issue in a new research note titled U.S. Thermal Coal: Appalachia Struggles, But It’s Not Lights Out For All.

“Arguably, the Patriot bankruptcy is likely to raise capital costs and sensitize investors to financial risks,” wrote Bandy.  “This report seeks to take a deeper look at the financial health of the U.S. coal industry.”

One metric Bandy looked at was the Altman Z-score, the statistic created by legendary bankruptcy expert Edward Altman.

The Altman Z-score looks at various leverage metrics including debt to EBITDA and interest coverage.

“Only Arch [Coal] has an Altman’s Z-scores below 1.1, indicating a high likelihood of distress in the next two years,” wrote Bandy.  “If Altman’s Double Prime Z is used to account for the capital intensity of the mining business, all companies are above the distressed category of Z<1.1.”

So, it’s no surprise that Bandy has an underperform rating and a $4 price target on Arch, which closed at $5.90 per share today.

Here’s a chart breaking down the coal industry’s Z-scores:

coal industry

Photo: BMO Capital Markets

SEE ALSO: JPMorgan’s Tom Lee Names The 17 Best Stocks Right Now >

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.