This really isn't what coal investors needed or wanted to hear -- another large producer lowering its guidance for the next year. The culprit today was Arch Coal (NYSE:ACI), and while this major player in low-sulfur coal still has a lot of positives going for it, it picked a bad time to make investors nervous about its future growth prospects.
It was an all-around challenging quarter for Arch Coal. Average per-ton price realizations were good (up 18% on average), but total tons sold dropped 3% due to rail service issues and the outage of the West Elk mine. Unfortunately, operating costs continued to rise (about 24% per ton) even though some of that apparent rise was due to events that should be non-recurring "one-offs." When you look at the bottom-line result (and exclude a whole passel of charges and gains), you see that net income dropped a bit from last year, though operating cash flow was considerably higher.
So what's the deal with coal companies anyway? Aren't utility inventories at a very low level? Isn't coal an attractively priced fuel alternative until/unless natural gas dips below $6? Isn't production constrained?
Yes, yes, and yes -- but it's never quite so simple. Trading momentum pushed natural gas prices up to ridiculous levels; now they might get pushed down (momentarily, at least) to very low levels and drag coal along with it. There are also worries that the installation of more scrubbers at utilities will shrink emissions premiums, thus slightly devaluing Powder River Basin coal.
Arch Coal's stock has been the strongest performer of the major coal companies, beating out the likes of Peabody (NYSE:BTU), Foundation (NYSE:FCL), Massey (NYSE:MEE), and CONSOL (NYSE:CNX) over the past year. And we all know that old adage, right? The higher you rise, the further you fall.
I still like the medium-term outlook for Arch, and for coal in general. Old contracts will roll over and reprice at better levels, utilities will still need to replenish their inventories, and the U.S. seems to finally accept that building up non-oil/gas energy capabilities is a good idea. But right now, investing in this stock feels like stepping in front of a freight train. Count me out.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
