Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Coal Stocks Bounce off Bottom; Time to Buy or Sell?

Fundamentals in the coal sector have been challenged for the past three years. The global oversupply of thermal coal, which is used for electricity generation, has kept a lid on coal prices. Higher-cost coal supplies around the world have been exiting the market, but at a slower pace than expected. Newer supplies of lower-cost coal have been replacing it. Production growth from Australia, Colombia, and Indonesia has been robust over the past two years. 

On the coking coal side, which is the coal used for making steel, supplies from Australia have been rising for three straight years. Flooding in Queensland, which was a major disruption to supply in two of the past seven years, did not occur this year or last year. In addition, multiple rail and port infrastructure improvements have come to fruition. This has culminated in a quarterly coking coal settlement of $120 per metric ton, which is the lowest in six years.  We are weeks away from the announcement of the next quarterly coking coal settlement, which is expected to be very close to the existing $120/ton. 

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/ton. Since 2009, the costs of mining both coking coal and thermal coal have risen dramatically. As a result, operating margins (especially unit margins) have tumbled. Globally, no coal producer has been able to thrive in this depressed market. 

After sinking tremendously since 2011, though, coal companies have bounced back from 52-week lows. Arch Coal (NYSE: ACI  ) is up 15.6%, Peabody Energy (NYSE: BTU  ) is up 16%, Alpha Natural Resources (NASDAQOTH: ANRZQ  ) is up 24.2%, Natural Resource Partners (NYSE: NRP  ) is up 25.3%, and Walter Energy (NASDAQOTH: WLTGQ  ) is up 35.8%. Is this merely a dead cat bounce, a relief rally, or the start of a major move higher? 

U.S. coal producers are in a world of pain
Walter Energy issued 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, Arch, and Peabody. Consol Energy and Alliance Resource Partners LP have been far less affected by analyst cuts, primarily because Consol has a substantial natural gas business and Alliance is the lowest-cost producer in two prime basins. Both have much stronger balance sheets than the others. Please see this bullish article on Alliance Resource Partners for more information on that company. 

Debt, a large chunk of which was 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, which had a lot more operating problems than Alpha bargained for. Walter acquired a Canadian asset, Western Coal, which had high costs; although they have come down, the costs are still too high (and Walter's Canadian operations are idled). Arch bought International Coal, a company that was 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 is on sale, but is it time to buy? 
Despite recent gains, most of these companies are down 80%-90% from 2011 highs. This begs the question of whether now is a good time to buy them. The sector is despised. I've written extensively about coal companies since 2011 and have been both right and wrong on calling turning points. This time around I must note that while all of the pieces are in place for a bottom, I see no near-term catalyst for a major rebound. That sounds like an ambiguous call, so let me explain. 

2014 was supposed to be a turnaround year for coal fundamentals. The rebound in natural gas prices from a cold winter was a good start. However, coal prices simply have not moved significantly higher as natural gas has. With 2014 a bust, will 2015 be substantially better? Maybe, but U.S. coal producers need big moves in coal prices, not small ones. There's still a lot of coal-producing capacity that's idled on the sidelines, and it could come back online with moderately higher prices. 

Bottom line
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 more importantly the companies' annual 10-K filings. Even investors who own shares of coal companies or have owned them in the past need to take a fresh look because a lot has changed. Not only has debt become a crushing weight for many, but operating footprints and growth plans have changed as well. Doing some due diligence in the coming months could lead to some smart buying opportunities later this year.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3005339, ~/Articles/ArticleHandler.aspx, 8/30/2015 2:14:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Peter Epstein

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
ACI $8.21 Up +1.18 +16.79%
Arch Coal, Inc. CAPS Rating: **
ANRZQ $0.05 Up +0.01 +38.00%
Alpha Natural Reso… CAPS Rating: **
BTU $2.39 Up +0.11 +4.82%
Peabody Energy Cor… CAPS Rating: **
NRP $3.22 Up +0.23 +7.69%
Natural Resource P… CAPS Rating: **
WLTGQ $0.13 Up +0.05 +58.23%
Walter Industries,… CAPS Rating: **