The coal industry is likely to recover from ongoing crises as economic activity improves and natural gas prices rise enough to make coal a cost competitive energy source. Last year, coal generated 37.4% of all U.S. electricity, and it is expected that coal-fired electricity generation will increase to 40.2% this year as natural gas prices rise, making coal more cost competitive. Improved coal inventory management is also likely to benefit the coal industry as the supply cut will lead to a price increase.
The foolish large coal company
Last month, Arch Coal Inc (NYSE:ACI) announced to sell its Utah mines for $435 million. The transaction will also help the company to save $200 million in administration and capital expenditure from 2014 to 2017. The completion of the transaction augurs well for the company as it will improve liquidity and result in cost saving. The sale of its Utah mines is expected to increase Arch Coal Inc (NYSE:ACI)’s liquidity by almost $400 million to $1.7 billion.
However, if the coal industry continues to face hard times in the future, Arch Coal Inc (NYSE:ACI) might have to continue selling its assets to create liquidity and ensure its survival. Continuous selling of assets will negatively affect the company’s financial performance in the long run. Hence, quick recovery in the coal market remains an important factor for Arch Coal Inc (NYSE:ACI)’s stock price performance in the future.
Despite the large plunge in the stock price and negative bottom line results, Arch Coal is not at a risk of bankruptcy in the short term, as its debt is long term and no significant debt maturity is scheduled until 2016. However, if coal market conditions do not improve in the upcoming years when the debt matures, the company could be subject to bankruptcy.
Coal and gas play
In the given uncertain environment for the coal industry, CONSOL Energy Inc. (NYSE:CNX) remains an attractive investment as it is involved in both the coal and gas businesses. As coal and gas substitute for each other, performances of both the businesses move in opposite directions, hence CONSOL Energy Inc. (NYSE:CNX) provides a diversified investment opportunity.
CONSOL Energy Inc. (NYSE:CNX) management has a proven track record of monetizing the gas reserves, and its execution strategy of monetizing core and non-core assets remains an important catalyst for the stock price. If the natural gas price rises above $4 mmBtu, it will benefit CONSOL Energy Inc. (NYSE:CNX) as thermal coal prices will rise due to higher gas prices and its gas business segment earnings will increase.
Additionally, the company has been focusing on margin expansion, which is likely to be achieved by improving upon its cost structure. Also, average unit cost for gas is likely to decline due to economies of scale as gas volume grows that will have positive impact on the company’s earnings.
Given the weak coal market conditions the company has been working to improve its cost structure. Moreover, as natural gas prices are rising, demand for coal will rebound and will positively impact the stock price of CONSOL Energy Inc. (NYSE:CNX).
Thermal coal play
The company registered an adjusted EBITDA miss in the first quarter by posting an adjusted EBITDA of $48 million, $16 million lower than the analysts’ consensus. Due to weak coal prices, Cloud Peak Energy Inc. (NYSE:CLD) lowered its midpoint of EBITDA guidance from $265 million to $245 million for 2013 full year. Volume guidance for 2013 was also narrowed to 88-92 million tons, from 87-93 million tons guided previously by the company.
As the electricity producers burn more coal in upcoming months, due to higher natural gas prices, demand and price for thermal coal will recover. That bodes well for the company. Additionally, the company has low costs and a solid balance sheet, which offers a potential for attractive returns for investors as thermal coal prices increase.
My final take
Coal markets are expected to rebound as natural gas prices increase and demand for coal from China and other important coal markets recover.
As the coal market strengthens in upcoming years, Arch Coal has potential to offer attractive capital gains to investors, as the company has experienced a significant share price drop and the worst is already priced in.
CONSOL Energy Inc. (NYSE:CNX), on the other hand, offers a less risky and diversified investment opportunity as the company has exposure to both coal and gas businesses. Cloud Peak Energy Inc. (NYSE:CLD) is an attractive investment opportunity in case of recovery in thermal coal demand and prices. However, risk remains in shape of potential capital loss for the companies depending on timing and extent of recovery in the coal market.
The article Conditions Remain Tough for the Coal Industry originally appeared on Fool.com and is written by Faizan Chudhry.
Faizan Chudhry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Faizan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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