Why Alpha Natural Earnings Could Look Scary

Alpha Natural Resources (NYSE: ANR  ) will release its quarterly report on Friday, and investors already know that the company is having a tough time dealing with terrible conditions in the coal industry. For now, the question isn't when the company will become profitable but rather when Alpha Natural earnings will start moving in the right direction rather than seeing losses continue to widen.

Oil and gas production has enjoyed a huge renaissance in the U.S., as massive finds of new reserves from unconventional plays have raised calls of energy independence for the nation. Yet the coal industry has largely been a casualty of that good fortune, as low prices for natural gas have led to coal users shifting their consumption to gas. Can Alpha Natural find enough demand from export markets to keep its sales up? Let's take an early look at what's been happening with Alpha Natural Resources over the past quarter and what we're likely to see in its quarterly report.

Stats on Alpha Natural Resources

Analyst EPS Estimate

($0.59)

Year-Ago EPS

($0.33)

Revenue Estimate

$1.24 billion

Change From Year-Ago Revenue

(33%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Alpha Natural earnings stop the bleeding?
Analysts continue to get more pessimistic about Alpha Natural earnings prospects, widening their loss estimates for the June quarter by just a single penny but adding a full $0.25 to their loss call for the full-year 2013. The stock price has reflected that pessimism, as shares have fallen nearly 25% since late April.

Alpha Natural's earnings from the previous quarter show the extent to which coal's decline has affected the company's results. Revenue plunged more than 30% from the year-ago quarter, and net losses almost quadrupled as both coal volumes and average margins fell by double-digit percentages. As a result, the company greatly reined in capital expenditures in order to maintain positive cash flow.

Alpha Natural hopes that its recent restructuring will help it succeed in the tough environment. By emphasizing higher-cost metallurgical coal for export, the company believes it can boost its revenue, but with steel-making activity at low levels as well, the payoff from the move will be muted until global industrial activity picks up. Arch Coal (NYSE: ACI  ) , which has also suffered losses recently, has done a good job of taking advantage of the Chinese market for coal, with expectations of quadrupling its exports by the end of the decade, and Alpha Natural could double its exports with its current capacity.

Yet coal also faces environmental pressure from the government. Alpha Natural shares plunged along with other coal stocks as new emissions regulations included existing coal-fired power plants. Such moves will force utility companies to bear new costs and potentially lead to even more moves toward gas-fired plants.

Moreover, Alpha Natural's location in Appalachia isn't ideal. Peabody Energy (NYSE: BTU  ) CEO Greg Boyce said that he expects "noncompetitive production [to be] removed from the system" in the future, essentially predicting that Alpha Natural, CONSOL Energy (NYSE: CNX  ) , and other Central Appalachian players will have to shut down mines and reduce production, helping bring prices back into equilibrium. Peabody announced relatively strong results last week, but its assets are better placed in areas with closer proximity to the highest-demand markets.

In the Alpha Natural earnings report, watch to see how well the company has been able to shift its production mix to take advantage of higher-value met coal. Without some innovative strategies, though, Alpha Natural will struggle to work its way back to profitability in the coming years.

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