What: Shares of Cloud Peak Energy (NYSE:CLD), a miner of thermal coal in the Powder River Basin, were clobbered in June and sank 19%, based on data from S&P Capital IQ. The impetus for the decline rests with a combination of negative sector sentiment and a presentation made by the company in mid-June.
So what: The first problem Cloud Peak Energy is dealing with is a mountain of negative sentiment toward coal miners. Some of Cloud Peak Energy's peers are facing scrutiny over their ability to cover reclamation costs in the event of environment damage and may be forced to raise capital, while short-sellers have been absolutely unrelenting in their pursuit of coal companies. Cloud Peak Energy is no stranger to investor pessimism, with the number of shares held by short-sellers rising by more than 1.1 million between May 15, 2015 and June 15, 2015 to 12.1 million. For what it's worth, Cloud Peak Energy met all of its financial requirements with regard to covering potential environmental concerns earlier this year.
The other source of pessimism relates to an investor presentation by the company at the Barclays High Yield Bond & Syndicated Loan Conference. Presenters spent time discussing the desire for utilities to switch from coal-fired plants to cleaner burning (and cheap) natural gas, noting that the switch becomes economical with natural gas prices "on a Powder River Basin basis" of between $2.50/MMBtu and $3.50/MMBtu. Natural gas prices are currently around $2.80/MMBtu, implying that we're unlikely to see utilities slow in their desire to switch away from coal and toward natural gas.
Now what: The $64,000 question that investors need to ask here is whether or not Cloud Peak Energy is "just another coal miner," or if it has what it takes to survive what could be a wave of bankruptcies and consolidation throughout the sector.
On the surface, things look as if they'll get worse before they get better. Even with the scant few bankruptcies we've witnessed thus far, production isn't slowing. In other words, we're seeing reorganizations that allow coal companies to continue to work throughout the bankruptcy process. Ultimately, this isn't helping the oversupply issue or pricing, and that could mean more weakness ahead for Cloud Peak Energy.
But, on the other hand, Cloud Peak Energy has a much more attractive balance sheet than its peers with just $563 million in debt. Lower debt levels gives the company more flexibility, as well as lessens the amount it pays in annual interest. Thus, Cloud Peak Energy should be in a more favorable position should coal prices remain weak. Plus, Cloud Peak Energy is looking to boost its exposure via exports to Asia, which should slowly help buoy its bottom-line.
I'd remind investors once again that coal stocks are only meant for the riskiest of investors at the moment. It's always possible a wave of bankruptcies could completely wipe out investors – even in Cloud Peak Energy if thermal coal prices remain weak for many years. But, on a high-risk, high-reward level, I could see a scenario where Cloud Peak survives and rewards investors many times over.