Is Coal on a Collision Course to Bankruptcy?

Photo credit: Flickr/Bert Kaufmann 

Barron's recently had an interesting piece about coal companies being on a long-term collision course with bankruptcy. The article pointed to research by an analyst that suggested while there is no near-term risk of bankruptcy, Arch Coal (NYSE: ACI  ) , Peabody Energy (NYSE: BTU  ) , and Alpha Natural Resources (NYSE: ANR  )  were all on a long-term path that's heading in that direction.

The debt market is already worried
One of the issues that the article pointed out is the fact that the debt market is already worried about bankruptcy at Arch Coal and Alpha Natural Resources. The unsecured debt of both companies is currently trading at distressed levels of $0.70 to $0.80 on the dollar, with yields in the midteens.

  

Photo credit: Flickr/Alan Cleaver 

On a more positive note both Alpha Natural Resources and Arch Coal currently have plenty of cash. Both boast a billion dollars in cash equivalents, which mutes any near-term risk. But that's only enough cash to last these companies about three years at the current burn rate. It's at that point that both could be facing a liquidity crisis that could lead to a possible bankruptcy.

Meanwhile, Peabody Energy is in a little better shape, though its debt load is still high. That still might have an impact on shareholders as one solution that could be on the table is that Peabody could sell shares to pare down its debt load. Unlike Arch Coal or Alpha Natural Resources, Peabody Energy could actually raise equity capital from the market.

Weathering the storm that just won't end
The biggest issue for Peabody Energy, Arch Coal, and Alpha Natural Resources is that the current storm in the seaborne coal market just won't pass. Coal prices have remained at depressed levels for longer than anyone expected and at this point no one knows when, or even if, prices will rebound. That being said, if coal prices do rebound then all of this bankruptcy discussion is likely a moot point.

There is reason to be hopeful that a rebound will happen. As the following slide from a Peabody Energy investor presentation notes, the seaborne thermal coal market is projected to grow through the end of the decade.

Source: Peabody Energy Investor Presentation (Link opens a PDF

As that slide points out there is 250 GW of new coal-fired power generation coming online over the next few years. Those power plants will require a lot of coal, which will increasingly be supplied by the export market.

Meanwhile, metallurgical coal demand is also expected to grow in emerging markets which should not only help Peabody Energy, but provide a boost to Alpha Natural Resources as it's a large metallurgical coal exporter. According to Peabody Energy global metallurgical coal demand is expected to rise by 20-40 million tonnes per year, with greater imports needed to meet that demand.

Investor takeaway
Coal producers are in a tough stretch right now. If the market for coal doesn't improve both Arch Coal and Alpha Natural Resources could be on a collision course to bankruptcy. That being said, neither is without hope as there are positive fundamentals in the coal market that could yield increased demand for seaborne coal. The only question is if that demand will push prices higher before these companies run out of cash. 

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  • Report this Comment On May 31, 2014, at 12:50 PM, Mark2013 wrote:

    Anyone who believes coal is headed towards bankruptcy is clueless of what they are talking about. Some have motivations being short various stocks but I do not see ANR, ACI or BTU going bankrupt.

    If coal went bankrupt as a whole in the States and those three companies pretty much are the whole, the States would be out of business, bankrupt and the power off that same day so it is insane to believe coal is going bankrupt.

    Coal has, is and will continue to be the NUMBER ONE leading part of the pie of energy in the USA. Combine coal with natural gas and you get about 67% of the energy in the States. I know, it is great to think green per pollution but Solar and Wind power are not the answers since it is an impossibility to find enough Cities that are sunny all the time and windy lol so we must think in terms of clean coal and ways to make it cleaner. Coal is also used in tangible mass type material things. Things that are mass like your desk is mass of those tiny particles all vibrating under the microscope.

    I think it's time people take a look at the pie of our energy in the States to see that coal even if a war brought against it which would take both Houses of Congress, USSC and a President over 100 years to stop coal! This means the next 20 years at the least, coal will lead.

    I've not read the article will link you to other than I know it has the energy pie chart from I think 2010 and that has not changed but you need to see it if you think Coal is going under because really, if it goes under then we have no nation because once the power went off, those who need meds die quickly from lack of meds, hospitals close, everyone is out of a job and the Internet is gone as the riots start putting us all in great danger just from the riots of people trying to get basic survival things not to mention those who just want to get other things they don't need.

    Coal is here to stay and we are in fact in global COOLING again not warming. Humans have egos big as heck but have little influence over climate. City Heat Island is largest effect but in reality a tiny amount and then there are those who do seeding and other things which doesn't works so great but with the Sun controlling 98% of climate, earth wobble 1% that leaves only 1% for volcanoes, fungus that grows naturally on Oceans, cows and many other things long before we get to humans in that percentage point so forget climate change per coal. Climate is not static. It always changes with or without humans. This century will average out colder than the last and if you type in Google; global warming scientists admit defeat you see what I mean.

    I MUST say this post is just my opinion and yes, I am long some of the coal stocks mentioned and probably likely to add more shares soon since I think it is really a bottom we are at and near turnaround in that sector.

    http://www.wou.edu/las/physci/GS361/Fossil%20fuels/Coal.htm

  • Report this Comment On May 31, 2014, at 1:23 PM, Paulson545 wrote:

    Like it or not obama's war on coal is working, coal stocks are trading at 52 week lows and there does not seem to be an end in sight. No matter what positives some people seem to see in coal they keep going lower...jmho

  • Report this Comment On June 03, 2014, at 4:06 PM, Peter405 wrote:

    President Truman detested two handed economists; he once yelled out : Bring me a one handed economist.

    On one hand...but on the other hand.

  • Report this Comment On June 03, 2014, at 8:23 PM, NOISYDEADHEAD wrote:

    MARK2013 i hopeyour right. do you think the latest shares price beatings going on are just the work of devious brokerage firms? playing the hands for the big shorts?

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