Please ensure Javascript is enabled for purposes of website accessibility

Cloud Peak Energy Inc. Stock Jumps on Credit-Rating Upgrade

By Matthew DiLallo - Oct 18, 2016 at 3:41PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

But the coal producer’s debt is still considered junk-rated by the rating agency.

Image source: Getty Images.

What happened

Cloud Peak Energy (CLD) stock soared 10% by 3:00 p.m. EDT on Tuesday after S&P Global raised the coal producer's corporate credit rating.

So what

Analysts at S&P boosted Cloud Peak's corporate credit rating from SD to B-, while also raising the rating on the company's 2019 senior unsecured notes from D to CCC. However, they still have a negative outlook on the coal producer. Furthermore, the upgraded ratings are still considered very speculative and imply that while the company currently can meet its financial obligations, it is very vulnerable to defaulting if conditions deteriorate.

That is certainly a concern at S&P, which said:

The negative outlook reflects the weak operating performance and the uncertainty of the company's ability to generate positive operating cash flow in the next 12 months...We do not rule out the possibility of further decline in cash flows if the domestic demand continues to deteriorate due to continued volume rationalization and increased competition from stronger players emerging from bankruptcy. We could lower the rating if the company's liquidity position becomes less than adequate (including breaching its minimum liquidity covenant) or leverage increases above 8x. This could happen if adjusted EBITDA drops below $75 million in 2017.

Cloud Peak Energy has quite a hole to dig out of, with S&P suggesting that it needs to get its debt-to-EBITDA ratio below five before it would consider another upgrade. Given the continued weakness in the coal market, that is not likely unless the company sells assets.

Asset sales are the likely path that rival coal producer Teck Resources (TECK 0.32%) will take to trim its leverage and win back an investment-grade credit rating. According to recent comments by Teck Resources' CFO, it needs to reduce debt by $1.5 billion to $2 billion, and it is considering select asset sales to hit that target, including selling some infrastructure and non-core exploration assets. By regaining an investment-grade credit rating, Teck Resources could significantly reduce its cost of capital. For Cloud Peak Energy, just digging out of its debt hole would give it some more breathing room so that it does not join its rivals and file for bankruptcy.

Now what

Despite the credit rating upgrade, Cloud Peak Energy is a very speculative company. If the coal market starts sinking again, that could be enough to push the company into bankruptcy and wipe out investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cloud Peak Energy Inc. Stock Quote
Cloud Peak Energy Inc.
CLD
Teck Resources Limited Stock Quote
Teck Resources Limited
TECK
$40.29 (0.32%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.