Patriot Coal Declares Bankruptcy, Citing Industry 'Transformation' (Update 1)

Updated to reflect Patriot Coal bankruptcy filing

NEW YORK ( TheStreet) -- Struggling coal company Patriot Coal ( PCX) has filed for bankruptcy, citing a coal industry "transformation" that made its financial position untenable.

The St. Louis-based thermal and metallurgical coal producer has arranged for $802 million in debtor-in-possession financing from Citigroup ( C), Barclays ( BCS) and Bank of America Merrill Lynch ( BAC) to help finance its operations through the bankruptcy process.

Davis Polk & Wardwell will serve as Patriot Coal's legal advisor in bankruptcy, while Blackstone Advisory Partners will be its financial advisor. The company has also hired Ted Stenger, a managing director at AlixPartners to be its chief restructuring officer, reporting to the company's CEO Irl Engelhardt.

Patriot Coal's bankruptcy comes as the coal industry faces major challenges including high debt, slumping natural gas prices, and new emissions regulations that have made it a less economic energy source for utilities.

In announcing its bankruptcy, Patriot Coal CEO Engelhardt characterized those challenges as part of an industry-wide trasformation. "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 Engelhardt in a statement released after the market close on Monday.

Just before the market close, Bloomberg reported that the company was considering a bankruptcy filing as early as today, a report that pushed Patriot shares down by over 70% to below $1. In after hours trading, Patriot Coal shares dropped nearly 40% to just above 37 cents.

For Patriot Coal, which was spun from international coal giant Peabody Energy ( BTU) in 2007, a high debt load and the slumping price of natural gas -- an alternative power plant input to thermal coal -- led some analysts to predict that the company would file for bankruptcy in 2012, if refinancing efforts and commodity prices didn't pan out.

Coal miners are also struggling with new emissions-based regulations, which alongside better economics for natural gas at current prices, led to the lowest use of coal-based energy since 1988, according to first quarter Energy Information Administration data.

In May, Patriot hired Blackstone Group ( BX) to help negotiate $625 million in refinancing, as some debt comes due in 2012. That month, the company also cut its earnings forecasts on the prospect that a default of a customer could negatively impact earnings from its metallurgical coal operations.

Prior to Monday's bankruptcy filing, Patriot Coal's shares were off over 70% in 2012 amid accelerating losses on slumping commodity prices and questions on whether the company could manage its debts.

In June, Credit Suisse analyst Richard Garchitorena noted that even after 25% to 60% share price drops in coal stocks this year, some companies like Patriot Coal remained expensive given expectations that some coal markets would continue to struggle. Still, the Credit Suisse analyst noted Alpha Natural Resources ( ANR) as most 'levered' to a price recovery that would make coal economic, while highlighting the metallurgical coal operations of Peabody Energy as his top stock pick in the sector due to the company's Australian and emerging market assets.

Metallurgical coal is in demand by emerging market economies like China because it is used in the coking process to produce steel. That contrasts to a dim outlook for thermal coal, which is mostly used in power generation and to fuel industrial companies. Natural gas hit decade low prices in 2012, though it has recently rebounded amid a late June and July heat wave.

In a late May reappraisal of the coal industry, Goldman Sachs raised its outlook for the sector to attractive from neutral, and highlighted Peabody as its only new buy-rated coal company.

"We have a less favorable view of the most CAPP thermal- and US metcoal-focused producers within our coverage," wrote Andre Benjamin in the May 28 note that cited valuations, regulatory pressures and leveraged balance sheets as concerns for U.S. centric players.

The expected outperformance of Peabody, a St. Louis-based company with a history that traces back to the late 19th century, should be taken as a context of the wider woes of the coal sector and some potential bright spots if commodity prices continue to recover.

For instance, in spinning off its longstanding operations in West Virginia and Kentucky into Patriot Coal ( PCX), Peabody has continued to tilt its asset base to Australian met coal and the Powder River Basin.

Signs of resilient Asian and emerging market steel demand may benefit U.S. players like Peabody Energy and Teck Resources ( TCK) with a big presence in Australian and Asia-Pacific metallurgic coal met coal mining, said BMO Capital Markets analyst Meredith Bandy in an interview in June.

For more on the sector's troubles, see why old king coal is headed to the retirement home. See 8 ways to play stocks in risky global markets for more on energy investment ideas.

-- Written by Antoine Gara in New York

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