BTU’s Coal

Peabody Energy gave their outlook and reported their second quarter resultsPeabody Energy Q2’12 earnings ahead of Street, but 2012 sales view lower at SNL.  BTU shares are down 10% on poor guidance from their Australian business for a myriad of reasons.

One key to a strong and sustained rebound in the US coal markets is the rationalization of supply.  In short, mine closures.  Today Peabody noted “U.S. coal demand will decline 100 to 120 million tons in 2012”.  That is 10%+ of the market.  Supply was cut back to near that run rate in Q2.

Since then many more coal mine closures have occurred.  Consol (CNX), for example, operated the Fola mine and closed it permanently (Pittsburgh BT).  The small players will lose disproportionately to the big players, like PBS Coals closing five mines (PBT).

Watch natural gas supply.  If coal fired base load electricity generation returns en force, US coal producers would be the big winners.  Weal C.

Was Patriot Coal doomed to fail?  “By most accounts, Patriot had a bright future when U.S. coal giant Peabody Energy Corp. spun it off as a separate entity in 2007, ahead of the global economic recession.”  SNL

Coal is down and petroleum products are way, way up: US rail traffic totals at Mining.

“Coal India Ltd., the world’s biggest coal producer, plans to spend as much as 125 billion rupees ($2.2 billion) over the next five years to build 300 kilometers of railway tracks and improve underground mining operations to arrest near-stagnant growth in output.”  WSJ  Expect them to come up short.

Arch Coal:  Updated chartology.

Tons of Coal, part 1: Valuations

The coal stock bull case has three catalysts:

  1. Valuations
  2. Will the depressed natural gas environment ever end?
  3. Emerging market demand growth

This look at ANR, ACI and BTU notes “Investors are anticipating Alpha Natural to report…a loss of 25 cents a share, a decline of $1.21 from (adjusted) 96 cents during the same period last year.”  ANR stock trades at less than 2 times a normalized earnings number.  ACI’s market cap is less than twice last years EBITDA.

Don’t back up the truck just yet.  These guys carry a lot of debt and their enterprise value to ‘normalized’ earnings and cash flows are very tasty but not give-away valuations.  The different names all have varying exposures to met coal to watch too.

A well done piece showing the danger of being high cost:  Patriot Coal: High hopes at IPO, but Chapter 11 in five years at ReutersPatriot Coal Bankruptcy:  Hidden Value for the 8..25 Guaranteed Notes? by Distressed Debt Investing.

I expect second quarter 2012 results, as they are released over the next few weeks, to be a mess.  Think ‘one-time’ expenses related to paring operations.  But trough ‘adjusted’ earnings do not look so bad in this All eyes on 2013 contracting leverage ahead of coal company earnings report at SNL.

Listening to what the coal and rail companies say will be important.  So will the stock reactions to results.  Coal pricing has bounced off a bottom:  EIA.

Met coal producer Suncoke (SXC) plans to MLP a portion of their working interests.

Arch Coal chartology.

Peabody (BTU) is the closest thing the group has to a blue chip.  Peabody is the largest industry participant with a stronger balance sheet and better margins as a low cost operator.  Alliance Resources (ARLP) has been a remarkable story for the past decade, is the low cost producer and as a MLP sports a tasty dividend.  Natural Resource Partners (NRP) has my favorite business model as a royalty play.  James River Coal (JRCC) carries the most possible upside, yet ought to be avoided.  Without an immediate industry turnaround, bankruptcy is likely.

Alpha (ANR) and Arch (ACI) might have the best risk/reward profile for an industry turnaround.  Neither would survive a years long long industry depression, but both look to do well if the industry rebounds.  Alpha is more Appalachian heavy and high cost.  At this point Arch is my favorite play and the only one I own.  Yet.  As these company’s report second quarter results I expect to learn a lot more about all the industry participants.  I’ll keep you informed.