Coal market weakness causes Oxford shuffle in western Ky.

Oxford Resource Partners LP (NYSE:OXF), which produces high-sulfur coal in Ohio and western Kentucky, said Feb. 29 that it had a net loss for the fourth quarter of 2011 of $5.1m, compared to a net loss for the fourth quarter of 2010 of $1.6m.

Contributing to the increased net loss was lower adjusted EBITDA of $12.2m, down $2.2m from $14.4m for the same quarter in 2010. Other contributing factors were higher depreciation, depletion and amortization of $1.5m and higher interest expense of $1.1m due to higher borrowings outstanding and a bank amendment fee of $0.5m.

For the fourth quarter of 2011, total revenue increased $7m or 7.8% over the prior year quarter with coal sales revenue increasing 4.5% or $1.71/ton. Cost of coal sales increased $10.4m or 18.1% while cost of coal sales on a per ton basis increased $3.64 or 12% year-over-year. The decrease in coal sales margin was primarily attributable to higher diesel fuel prices, increased wages and benefits and higher operating lease expense which in total accounted for over 75% of the adjusted EBITDA decrease.

Production and sales volume increases in the fourth quarter were limited to 2.6% and 0.1%, respectively, over the same quarter in 2010 due primarily to key permit issuance delays at Oxford’s newly-opened Ellis and Shuman mines and supplier performance issues related to a long-term coal purchase contract. Production of clean coal in the latest quarter was nearly 2 million tons, up from 1.9 million tons in the year-ago quarter.

Net loss for full year in 2011 was $13.1m, compared to a net loss for 2010 of $7.4m. For 2011, total revenue increased $43.8m or 12.3% over the prior year with coal sales revenue increasing 10.3% or $2.42/ton. Cost of coal sales increased $43m or 18.7% while cost of coal sales on a per ton basis increased $2.78 or 9% year-over-year. Contributing to this per ton increase were higher diesel fuel prices, increased wages and benefits and higher repairs and maintenance, which accounted for nearly 90% of the increase.

Despite the negative impacts experienced throughout the year, clean production and sales volumes for 2011 were up 6.9% and 3.8%, respectively, over 2010 which contributed to the increase in adjusted EBITDA year-over-year. The clean coal production figure for 2011 was nearly 8 million tons, up from 7.5 million tons in 2010.

Oxford President and CEO Charles Ungurean said: “Significant weather disruptions, key permitting delays and supplier performance issues negatively impacted our production and sales volumes throughout the year. Due to decreased productivity and higher costs, our adjusted EBITDA and distributable cash flow were much lower than anticipated.”

Ungurean added: “Going into 2012, with our fully contracted sales book at higher prices we expect improvement in our 2012 financial results as compared to 2011. We do, however, find ourselves facing a general softening of the coal markets. As a result, we have had to accommodate the changing supply profile of some customers and have done so to date without adversely impacting profitability. We also remain focused on reviewing and modifying our operations to manage controllable costs and eliminate discretionary capital expenditures during this period of market weakness. For instance, in addressing certain aspects of our Illinois Basin operations, we have reached an agreement for 2012 and 2013 to purchase coal on more favorable terms rather than supplying our own washed coal on certain customer contracts, enabling us to idle one of our mines and shut down a wash plant, and allowing us to supply all of our Illinois Basin coal to customers on a raw basis, resulting in cost savings in 2012. We will continue to evaluate additional such opportunities over the course of the year.”

The Illinois Basin operations in question are located in western Kentucky. Other U.S. coal producers, including CONSOL Energy (NYSE:CNX) and Alpha Natural Resources (NYSE:ANR), have also lately announced production cutbacks due to slack markets.

For the full year of 2011, the Oxford’s distributable cash flow did not cover its distributions to its unit holders. It said its ability to pay its quarterly distributions substantially depends upon its future operating performance (which may be impacted by conditions affecting the coal industry as was the case in 2011), borrowing availability and other factors, some of which are beyond its control.

In 2012, the company projects production of clean coal of 7.5 million to 8 million tons, against nearly 8 million tons of actual clean coal production in 2011. The project for tons sold in 2012 is 7.9 million to 8.4 million tons, against nearly 8.5 million tons in 2011. The projected average sales price per ton, including transportation costs, is $50-$52/ton, up from $46.23/ton in 2011. The projected average sales price in 2012, net of transportation costs, is $43-$45/ton, against $40.64/ton in 2011.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.