Blood in the Streets: Is It Time to Buy Coal Stocks?

The latest blow to the coal sector was a quarterly coking coal settlement of $120 per metric tonne, a six-year low. The blood is flowing, the analysts are cutting targets -- is this the time to buy?

Mar 27, 2014 at 12:12PM

Fundamentals in the coal sector have been challenged for the past few years. Global oversupply of thermal coal, used for electricity generation, has kept a lid on coal prices. Only slowly is the higher-cost coal supply being curtailed. However, in some cases, newer supplies of lower cost coal are replacing it.  

On the coking coal side, the coal used in steel making, supply from Australia has been rising for three straight years. Flooding in Queensland, Australia, which was a major disruption to supply in two of the past six years, did not occur this year or last. In addition, multiple rail and port infrastructure improvements have come to fruition. This has culminated in the just-announced quarterly coking coal settlement of $120 per metric tonne, the lowest in six years. 

Not even in the depths of the financial crisis of 2009 was coking coal settled at a price that low. Back then, the price was $129/tonne. Since 2009, the costs of mining both coking coal and thermal coal have risen dramatically. Therefore, operating margins, especially unit margins, have tumbled. Globally, no coal producer has been able to thrive in this depressed market. Even a recent spike in natural gas prices due to a very cold U.S. winter failed to meaningfully move coal prices. 

U.S. coal producers in a world of pain, debt weighing heavily
Walter Energy (NASDAQOTH:WLTGQ) just issued new high-yielding bonds to help it live through the depressed coal market of 2014. Multiple analysts have cut price targets and lowered ratings on Walter, Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI), and Peabody Energy (NYSE:BTU). Consol Energy (NYSE:CNX) has been less affected by analyst cuts because it has a substantial natural gas business and a more manageable balance sheet.

Debt, a large chunk taken on in 2011, is a major problem for Walter, Alpha, Arch, and Peabody. All four made acquisitions at the top of the market that year and are now fighting for survival. Alpha acquired East Coast player Massey Energy. Massey had a lot more operating problems than Alpha bargained for. Walter acquired a Canadian asset, Western Coal. That operation had high costs, which although they have come down, are still too high (Walter's Canadian operations are idled). Arch bought International Coal, a company just beginning the capital intensive construction of a new mine. Peabody bought an Australian company, MacArthur Coal. MacArthur's niche product, "PCI" coal, fell out of favor within a year of that deal.

Coal stocks on sale, time to buy? 
These stocks are down 85%-95% from 2011 highs, begging the question of whether now is a good time to buy them. The blood is certainly flowing. The sector is despised. I've written extensively about coal stocks since 2011 and have been both right and wrong on calling turning points. This time around I note that while all of the pieces are in place for a bottom, I see no near-term catalyst for a rebound. That sounds like an ambiguous call, so let me explain. 

This week's surprisingly weak coking coal settlement suggests that there's no rush to get invested. 2014 is going to be a terrible, terrible year and there's no evidence that 2015 will be strong enough to save the debt-laden coal companies. To be clear, these companies are not going bankrupt this year -- they've spent the last two years preparing for lean times. Cash burn has been slashed, but with the benchmark coking coal price at $120/tonne, no U.S. player can make money.   

Final thoughts
Now is not the time to buy U.S. coal producers in any meaningful way. The next few months should be a period in which prospective investors get to know the companies --  read earnings call transcripts and importantly the annual 10-k filings coming out as we speak. Even investors who own coal stocks or have owned them in the past need to take a fresh look. A lot has changed. Not only has debt become a crushing weight, but operating footprints and growth plans are different. Doing some due diligence could lead to some smart buying opportunities later this year. 

Coal could be in trouble, but this trend is just getting started
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

 

Peter Epstein owns shares of Alpha Natural Resources, CONSOL Energy, and Walter Industries. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers