Bookkeeping: Adding to Massey Energy (MEE)

It's been a very busy day for transactions...

I normally don't add to a stock before earnings because there is a 50/50 chance of reaction either way. And it might not really matter what Massey Energy's (MEE) earnings are tomorrow because all that matters anymore in the commodity space is the price of oil. Of which I've been a near term bear. [Jun 26: Can a Near Term Top in Oil be Far Away?] I just did not expect every commodity within 6 degrees of Kevin Bacon to also be systematically destroyed with oil. Lesson learned. That said (ok maybe lesson not learned) I still believe in the coal and fertilizer stories. So I'm going to increase my exposure to Massey ahead of earnings tomorrow pushing the stake up from 0.6% to 2.5%. Purchases in the $73 range.

The stock is down 8% which can be attributed to (a) oil is down hence every commodity must be destroyed and/or (b) Consol Energy (CNX) laid an egg. One thing about Consol is they are notorious for production problems, lawsuits, or some problem here or there. Luckily we exited [May 30: Closing Consol Energy] but really it does matter - stocks that have given great earnings and guidance are being hammered just the same... Kevin Bacon after all. These are again 2009 stories but the market obsession with quarterly earnings has befallen CNX.

• Shares of Consol Energy Inc. fell sharply Thursday after the coal mine operator said its second-quarter profit dipped 34 percent as productivity problems pushed up costs.
• Consol said revenue and other income totaled $1.21 billion in the second quarter, compared with $1.06 billion in the same period last year.
• The results fell well short of Wall Street's expectations. Analysts polled by Thomson Financial were expecting Consol to earn 80 cents per share.
  
• Shares of Consol fell $12.64, or 14 percent, to $75.86 in midday trading.
• Chief Executive Brett Harvey pinpointed productivity problems that left highly productive longwall mining sections idled for lengthy periods as miners prepared new mining areas for problems in the quarter. In coal mining, lower productivity forces up costs per ton, eating into profits.
• The result was essentially flat production at higher cost. Consol said it produced 16.6 million tons during the quarter, compared with 16.4 million tons in 2007. Operating costs per ton rose to $32.03 from $25.46 a year ago.
• Currently, Consol is seeing 2009 prices ranging from $100 to $110 a ton for lower-quality coal for electricity generation to $265 a ton for high-quality metallurgical coal used to make coke for steel mill blast furnaces, Harvey said.
• As a result, Consol is hoping to increase annual metallurgical coal production by 3.5 million to 5 million tons over the next five years, Harvey said. "That's where we're focused right now."

It's been an interesting quarter for coal - most of the names have performed well in earnings, but two have laid eggs. And again, it has not mattered because even those that have performed have been punished with the fall in crude. But I believe there is a better than average chance that Massey will fall into the better than expected group. And as you can see from the statements from Consol, metallurgical coal is the focus - which is a strong area for Massey. And for a few of the other names which have outperformed this quarter. I've cut back my coal exposure overall and with other companies embroiled in buyout talks, this leaves us to focus on Walter Industries (WLT) and Massey Energy in the metallurgical space. It is interesting to reconcile the recent price action with the reports and articles of shortages of coal in certain parts of the world, but the market is the market. Money flow and perception is all that matters in the near term.

As a side note (thanks to reader for sending this to me) the rumor mill is heating up around AK Steel (AKS) as a buyout candidate. I point this out because that's part of my thesis for the metallurgical coal (and in fact perhaps all coal) producers - with the cheap U.S. peso we're giving away our farm piece by piece. AK Steel actually has been the subject of takeover rumor for 8 of the past 5 years, but I think there could be some truth to this one. The time is ripe to strike and consolidate the sector even further. And 4 names at once? Hmmm....

• U.S. steelmaker AK Steel Holding Corp (AKS) is looking to sell itself and has had talks with several parties, according to a dealreporter.com article published on the Financial Times website on Thursday.
• The company is seeking an all-cash deal, mergers and acquisitions website dealreporter.com said, citing unnamed sources.
• The website said ThyssenKrupp AG, Evraz Group SA, CSN and Severstal were interested in AK Steel.
• This is not the first time AK Steel has been a rumored takeover target. Over the last two years, United States Steel Corp (X) and Arcelor Mittal (MT) have also been named in various reports as possible suitors for the company.

Long Massey Energy, Walter Industires in fund; Massey Energy in personal account