Consol Energy (NYSE:CNX) released first quarter updates for the gas operations and coal mines that sent coal stocks soaring. No surprise that the Marcellus producer saw strong growth in the gas operations, but the market sent the coal sector higher with the forecast for higher coal production for the year.
Consol Energy was traditionally a coal miner that is quickly shifting toward a natural gas focus with the fast growth in Marcellus Shale production. The news comes on an interesting day, with James River Coal Co. filing for bankruptcy at the same time.
With the constant volatility in the domestic coal market, it favors the leader in Peabody Energy (NYSE:BTU). The global coal miner has the size and financial liquidity to take advantage of market weakness and even possibly scoop up any cheap coal assets that might hit the market.
Consol production increase
The coal sector is clearly too beaten down to get overly excited about the news from a marginal coal miner. Consol Energy raised its annual coal production range from 30.1-32.1 million tons to 31-33 million tons. Basically, the company upped production forecasts by 1 million tons due to strong thermal coal demand, or the equivalent of roughly 3% of annual production.
More importantly for Consol Energy, the company confirmed that Marcellus Shale natural gas production nearly doubled to 20.7 Bcfe from last year's production of only 10.7 Bcfe. In total, first-quarter natural gas production grew 23% year over year to 48.4 Bcfe.
As an example, Peabody expects annual coal production to average around 255 million tons, including U.S. sales of around 190 million tons. In addition, the company will produce about 36 million tons in Australia. In comparison, the Consol Energy production moves aren't material to the coal market.
Downfall of James River Coal
This week James River Coal announced that it had filed for Chapter 11 reorganization to restructure the balance sheet in a move that didn't surprise anybody. The company has long struggled with weak operating results and limited financial flexibility. For a coal industry struggling with profits due to environmental regulations and utilities switching to natural gas, the weak suppliers were expected to collapse. The bad news is that James River Coal plans to continue mining operations and coal shipments.
Prior to this decision, the company did idle four mines in Central Appalachia back on Nov. 6 and several others back in September. James River isn't a large miner, with production of only 1.9 million tons back in the third quarter of 2013 and only 9.5 million tons of coal produced back during 2012 prior to these and other mine cutbacks. The company did generate revenue of $1.1 billion during 2012 so the numbers are somewhat material.
Coal stocks have gotten a nice bounce with the positive news from Consol Energy on thermal coal demand and possibly the news that James River Coal will restructure and not dump coal on the markets. With coal stocks like Peabody Energy sitting close to multiple year lows, the news combination could signal a bottom in the market. Investors, however, should've already known that low natural gas inventories would eventually improve the domestic thermal coal market.
Peabody Energy remains the safest way to play a coal market rebound, especially now that Consol Energy is more of a play on Marcellus Shale growth. With Peabody still trading near lows, the stock might not be at the bottom, but the risk/reward equation appears to favor a long-term investment at this point.
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