All coal isn't created equal, and some areas of coal country are better positioned to prosper than others. The Energy Information Administration (EIA) recently signaled that Powder River Basin (PRB) coal was likely to see increased demand this year. It looks like that forecast was spot on, according to Peabody Energy (OTC:BTUU.Q) and Arch Coal (NYSE: ACI).
What the numbers say
The EIA looks at the big picture in the energy sector. With regard to coal, it recently noted that, "coal inventories in the electric power sector dropped by 31 million tons from the end of 2012 to 154 million tons at the end of September 2013. The significant drawdown reduced the stockpile to below the monthly five-year average and met the increased demand for electricity generation."
The first takeaway from that quote is that U.S. utilities increased their use of coal last year, largely because of rising natural gas prices. In other words, coal isn't dead. The second thing to note is that the more than 16% inventory reduction is a top-level number. And that's where it gets interesting as it notes that, "subbituminous coal, mostly from the Powder River Basin, was burned from stockpiles at a greater rate..." implying "...greater demand for delivery of PRB coal..." in the near future.
Boots on the ground
Looking at a picture from far away, like the EIA does, doesn't always provide the granularity needed to make investment decisions. That's why it's so encouraging that Peabody Energy and Arch Coal are making comments that back up what the EIA is seeing.
Peabody CEO Gregory Boyce spoke about the PRB on the company's fourth-quarter conference call: "We see positive pressure because of where inventories are at, where the weather continues to be, where gas prices are now above that $5 level... And so we see that market strengthening considerably based on its current trend rates particularly in stockpiles."
What does that mean? According to Boyce, "...PRB prices were up nearly 40% from their lows of last year." Now that's some boots-on-the-ground, good news. And it's being echoed by Arch Coal, where CEO John Eaves noted during the company's fourth-quarter earnings call that, "stockpiles at PRB-served customers are the lowest in the country..." and that, "some of our customers have raised concerns about potential stockpile shortages if these trends continue."
Eaves went on to say that Arch "...anticipate[s] a much more balanced and dynamic [coal] market in 2014 with the PRB benefiting meaningfully. In fact spot prices for PRB are up more than 40% since early 2012." That's great news for both Peabody and Arch, which are big miners in the region, though they each have notable exposure to other coal regions, too.
The big beneficiary
That's why you should keep your ears open when Cloud Peak Energy (NYSE: CLD) releases its fourth-quarter and full-year results. Cloud Peak is focused exclusively on the PRB, which means it will see the most benefit from this basin's early turn.
The only limiting factor for Cloud Peak is that it lacks the export options of Peabody and Arch. However, foreign coal demand isn't nearly as big as domestic demand when it comes to PRB coal. So, an upturn in the U.S. market is exactly what the doctor ordered in the near term, and it will help Cloud Peak work on its efforts to get bigger on the export front.
Watch Cloud Peak to see if management's take on the PRB is as positive as Peabody's and Arch's. While you're at it, make sure to listen to Alpha Natural Resources' (NYSE: ANR) upcoming conference call, too. The PRB only accounts for about 10% of this miner's business, so it won't see the benefits that Cloud Peak, Peabody, or Arch will. But, what it says about pricing and demand could shed additional light on what's happening "on the ground."
If Alpha and Cloud Peak are even half as positive as Peabody, Arch, and the EIA, it looks like at least one U.S. coal basin is entering recovery mode.
Coal isn't the only market dependent on China for heavy demand