Walter Energy, Inc. (NYSE: WLT) was downgraded from Overweight to Equal-weight with the price target lowered from $16 to $4 in a report issued by Morgan Stanley.

Analysts led by Evan L. Kurtz explained that "while evidence points to a bottom for [metallurgical] coal prices, the recovery will likely take longer and be weaker than our previous forecasts."

The downgrade came as a result of recovery timing for liquidity constrained metallurgical coal producers. "At the current $119/ton benchmark price," Kurtz estimated "that Walter has sufficient liquidity through 2015. However, the uncertain timing and magnitude of a price recovery leaves an insufficient margin of safety to remain Overweight Walter."

The report concluded that while Walter remains an option, Kurtz preferred Peabody from a risk-reward perspective with a more diversified business.

On October 2, Walter Energy shares surged on acquisition rumors but have since fallen.

Walter Energy Inc. recently traded at $1.76, down 9.3 percent.