Are there ANY Signs of Hope for Coal Companies?http://www.fool.com/investing/general/2013/08/29/are-there-any-signs-of-hope-for-coal-companies.aspx Reuben Brewer
August 29, 2013
Coal use for the generation of electricity was up almost 5% year over year in June according to the Energy Information Administration (EIA). Natural gas use was down 16%. The rise in natural gas prices over the past year continues to support a shift back to coal. Although that hasn't led to a changed view of the beleaguered coal industry, it eventually will boost the fortunes of companies with access to cheap coal.
The problem is that, despite increased coal use, coal purchases haven't started to rebound yet because utilities are burning coal they have on hand. In fact, the EIA reports that coal stockpiles were over 13% lower year over year in June. That trend, then, is just delaying the inevitable.
So, on a large scale, coal's customers are using more coal, but they aren't actually ordering more coal yet. The lackluster sales environment in the first half pretty much ensures that 2013 will be a bad year for most coal miners even if sales pick up in the second half. That's particularly true since most miners have contracted out the vast majority of their 2013 sales already.
On that front, Cloud Peak sounded almost optimistic in its second quarter earnings release: "There has been a significant increase in utility contracting during the quarter with many customers looking to rebuild their forward contracted positions after letting them decline significantly last year." In fact, the company notes that Powder River Basin inventories had declined to around 78 million tons by mid year, down from 98 million tons in the middle of 2012.
Management went on to highlight that "natural gas prices have remained at a level where most plants consuming PRB coal are economically able to dispatch coal." In other words, its cheaper for Cloud Peak's customers to burn coal. That's because the Powder River Basin produces some of the cheapest coal around.
Coal giant Peabody Energy (NYSE: BTU) estimates that coal from this region is competitive with natural gas priced in the $2.50 to $2.75 per million Btu (mmBtu) range. According to the EIA, Henry Hub natural gas came in at nearly $4 per mmBtu in June. Cheap prices is why Powder River coal has been a favorite of utilities and foreign countries in recent years. That's great for Cloud Peak, but it's solely focused on this coal basin, which increases business-specific risk.
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