Will BHP Buy Walter Energy?

Buyout buzz in the energy sector continues to be hot on Thursday. Speculation suggests that Australian diversified natural resources company BHP Billiton Limited (NYSE:BHP) could be interested in buying Walter Energy, Inc. (NYSE:WLT), a mid-cap American coal company.

Is There Any Merit to these Claims?

“It is market speculation and not something we care to comment on,” said BHP Billiton according to a ShareCast report. However, the market’s speculation has been considerable. Shares of Walter Energy were up over 6 percent in early afternoon trading, adding to a 6.5 percent gain on Wednesday that was likely unrelated.

Walter Energy is a “pure-play” metallurgical coal company, which could make it more attractive to BHP Billiton than thermal coal plays. According to a RenewEconomy report, BHP Billiton recently issued some bearish comments on the thermal coal market…

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“In a carbon constrained world where energy coal is the biggest contributor to a carbon problem, how do you think this is going to evolve over a 30- to 40-year time horizon? You’d have to look at that and say on balance, I suspect, the usage of thermal coal is going to decline. And frankly it should,” Marcus Randolph, chief executive of BHP Billiton’s Ferrous and Coal Division, is quoted as saying.

CHEAT SHEET Analysis: A Buyout Could be Good for Walter Energy

One of the core components of our CHEAT SHEET investing framework focuses on catalysts that will move a company’s stock. Mergers and acquisitions pretty much always fall under this category, particularly when a company that is performing poorly is bought by one that is performing relatively well.

While shares of BHP Billiton are down 3 percent this year to date, most analysts still expect the company to outperform. On the other hand, shares of Walter Energy are off by over 50 percent this year to date, and to many this could mean a cheap buy for a historically strong company.

Despite its huge year-to-date decline, Walter Energy’s stock price has still performed better than Alpha Natural Resources (NYSE:ANR) and Arch Coal Inc. (NYSE:ACI) for the period. Alpha Natural Resources is off over 65 percent this year to date, while Arch Coal’s stock has fallen over 55 percent.

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