Can Arch Coal Catch Up to Peabody Energy and CONSOL Energy?

Arch Coal (NYSE: ACI) will release its quarterly report on Tuesday, and shareholders are bracing for another huge quarterly loss from the coal miner. Even as peers Peabody Energy (BTU) and CONSOL Energy (CNX -1.11%) have found innovative ways to survive the weak environment for coal production, Arch Coal faces an ongoing crisis that threatens its long-term viability.

Arch Coal is dealing with many of the same issues that the rest of the coal industry faces, as persistently low natural gas prices have led many traditional coal users to shift their consumption toward gas. That's a big part of why CONSOL Energy has diversified its business toward the gas side of the energy industry, with its coal-bed methane subsidiary giving it exposure to nat-gas and its coal-transportation assets cashing in on export demand. Yet Arch has a geographical disadvantage versus Peabody and some of its other peers in that its concentrated operations in the Appalachian region have given it less favorable export prospects. As Peabody and CONSOL have made strides forward, can Arch better use its reserves in the Powder River Basin and Illinois Basin to keep up? Let's take an early look at what's been happening with Arch Coal over the past quarter and what we're likely to see in its report.

Stats on Arch Coal

Source: Yahoo! Finance.

Will Arch Coal make it through coal's tough times?
In recent months, analysts have had mixed views on Arch Coal earnings, narrowing their loss estimates for the third quarter and the full 2013 year by about 10% but widening their 2014 loss projections by the same percentage. The stock has made no progress, trading down 2% since late July and staying near its lowest levels in more than a decade.

Arch is dealing with a dramatic shift in the coal industry, as growth in coal demand moves abroad. At the same time that environmental regulations in the U.S. are depressing demand from coal-fired power plants and other heavy users, Arch expects that 475 gigawatts of electrical generation capacity from new coal-fired power plants will become available around the world between now and 2017.

Unfortunately, Arch Coal isn't the best-situated coal miner to handle rising export demand, but the company is still working hard to keep its foot in the export door. Its agreement with Kinder Morgan Energy Partners (NYSE: KMP) to export coal using its Gulf Coast terminal facilities could lead to much greater export capacity, especially if growth in demand in China, India, and other hot energy markets makes buyers hungry for more coal. Yet because Peabody Energy has such extensive coal assets in Australia, it retains a huge advantage over Arch Coal in serving Asian markets. Alpha Natural Resources (NYSE: ANR) has also done a good job of providing both metallurgical and thermal coal to China, making it harder for Arch to compete.

Surprisingly, Arch stands out from Peabody and CONSOL because of its dividend. Arch continues to pay a 3% dividend yield despite its long-term prospects for continuing losses, declaring its most recent quarterly payout just last week. That's good news for income investors, but it also could be another potential blow in the future if persistent red ink forces Arch to discontinue those payments to conserve cash.

In the Arch Coal earnings report, look to see how sales of metallurgical coal compare to thermal-coal demand. Met-coal weakness has been a particularly large problem for Arch, but if conditions start to turn positive, it could give Arch the lift it's been looking for -- although it'll still be a long way from profitability in all likelihood.

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