It was a bad month for thermal coal miners in April. Foresight Energy LP (OTC:FELP) was one of the better performers, falling "just" 17% or so. Shares of Westmoreland Coal Company (NASDAQ:WLB) and Cloud Peak Energy (NYSE:CLD) fell by around 26%. Not every company got caught up in the wave of price declines, however: Alliance Resource Partners LP (NASDAQ:ARLP) was only off about 2%.
This actually follows the year-to-date trend, in which Alliance's shares have held up relatively well, while shares of Foresight, Westmoreland, and Cloud Peak have struggled since mid-February. The funny thing is, though, the coal market appears to be improving.
On May 1, Alliance reported first-quarter earnings of $1.10 per unit, well above the year ago figure of $0.36 per unit. Notably, it sold nearly 30% more coal in Q1 2017 than it did in the same period of 2016. Alliance is one of the best-positioned and best-run U.S. thermal coal miners, so this was just another in a long string of industry leading results. However, Alliance also gave an impressively positive update on the coal market, with CEO Joseph Craft noting that natural gas prices have been resilient (making coal a price-competitive fuel option for utilities) and coal sales have been strong, with real potential for more sales as the year progresses.
That's not materially different from what Cloud Peak highlighted when it released earnings on April 27. The big difference, however, was that Cloud Peak lost $0.30 a share. Granted, that was better than its $0.59 a share loss in Q1 2016, but clearly, the coal market needs to see further improvement before Cloud Peak starts making money again. Cloud Peak, for reference, sold around 8% more coal year over year. The earnings juxtaposition, though, is the really important figure to note.
During the U.S. election, then-candidate Donald Trump spoke at length about helping the coal industry. He has continued that rhetoric since his election, and relaxed environmental protection rules that have hampered the industry's profitability. But investors appear to be pricing in the fact that the thermal coal market has changed, and going back to the "way it was" just isn't possible.
Cloud Peak continuing to lose money even as the coal market improves is evidence of that. But the backstory is really what's important. Low natural gas prices led utilities to shift their power fleets toward the fuel. Older coal plants, meanwhile, were shut down. Yes, that change was in part due to concerns about carbon and other pollution. But the larger issue was that it was cheaper to build and run gas-powered power plants than coal plants. Too many new natural gas power plants have been built and too many coal plants closed for coal to get back to what it once was.
Thermal coal markets are legitimately improving. That's wonderful news for Alliance and its unitholders. In fact, when it reported earnings, the company hinted that it might be able to start increasing its distribution again in the near future. But Alliance has navigated the coal industry downturn far better than peers. If you are looking for a coal investment, this is where your research should start.
Companies like Cloud Peak, Foresight, and Westmoreland, however, continue to struggle despite an improving market. That suggests this trio would need notably higher coal prices or further restructuring efforts to get back solidly and consistently into the black. Since coal has lost material ground in the power space -- market share that it will likely never gain back -- these coal miners are facing an uphill battle. April's share price drops simply reflect that big-picture reality.