Over the past couple of years there's been too much coal sitting unused at utilities. The combination of bad weather and delivery delays because of rail congestion has changed that dynamic. Now utilities are complaining that they can't get enough coal!
There's nothing like a stretch of bad weather to remind us that we can't control everything in life. For example, U.S. railways have been having a hard time getting their trains running with all of the major players blaming freezing conditions for their troubles in a recent Rail Energy Transportation Advisory Committee meeting. And of course, when cold weather hits, we all use more fuel to keep ourselves warm.
That combination has pushed coal stockpiles at utilities to extremely low levels. In fact, Southern Company (NYSE:SO) Vice President of Fuel Services Jeff Wallace, told the committee that some utilities are, "very concerned about our ability to get [coal] supplies." Southern is actually taking some coal units off line to help reduce its stockpile burn ahead of peak summer demand even through it would be more profitable to keep them running.
A rightsizing market
This pairs up nicely with comments from Peabody Energy (OTC:BTU) and Arch Coal (NYSE: ACI). In his company's fourth quarter conference call, Peabody CEO Gregory Boyce noted that, "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..."
Arch Coal, CEO John Eaves commented during his company's fourth quarter call that, "Stockpiles at [Powder River Basin]-served customers are the lowest in the country..." Further, his statement that some of Arch's customers had, "...raised concerns about potential stockpile shortages if these trends continue" now seems prescient since that's exactly what appears to be happening.
Both Boyce and Eaves stated that Powder River Basin (PRB) coal spot prices were up about 40% over their recent lows. Although not all coal regions are likely to see the same benefit, it's clear that the U.S. thermal coal market is starting to get back into balance with a little help from the bad weather and rail disruption.
Watch this quartet
That will be good news for Peabody, Arch, Cloud Peak (NYSE:CLD), and Alliance Resource Partners (NASDAQ:ARLP). Cloud Peak is the most direct play on a PRB coal recovery because it operates exclusively out of the region. It's also a solid choice for more-conservative investors since management has managed to keep the company profitable throughout coal's downturn. Moreover, like all coal miners, Cloud Peak has reduced costs and streamlined operations. When prices start to move higher, it should see a nice uptick in profitability.
Peabody and Arch, meanwhile, have more diversified operations. Most notably, Arch operates in the still struggling metallurgical coal market. That's going to keep earnings depressed even if there's an uptick on the thermal side of the business. Domestically, Peabody is in the PRB and the Illinois Basin (ILB), another well positioned thermal coal region. It also has Australian operations in thermal and met. It's easily the most diversified coal play available.
Alliance Resource Partners is focused primarily on the ILB. Although PRB coal stockpiles have been a focal point this year; ILB increased production 5% last year while PRB coal production fell 2%. Illinois Basin production gains even in the face of a weak coal market continues a trend that's led Alliance on an over decade-long run of record financial results. So, bad weather and rail congestion can only help one of the industry's top performers.
Don't look now!
There's still plenty of reasons to be concerned about coal. That said, thermal coal markets appear to be finding a point of equilibrium sooner than the market may have anticipated. This winter's bout of unexpectedly cold weather has clearly helped that process along. Cloud Peak's PRB focus will make it one of the first to feel the benefit. Expect continued strong results at Alliance, too, as the cold weather will aid already solid demand for ILB coal.
Trains are an old technology, but it's amazing how important such advances are...