Will production rise in 2013?
In the first four months of 2013 the total U.S production was only 319 million short tons. In comparison, during the same time frame in 2012 the total production was 344 million. This represents a 7.2% drop in production (y-o-y). The Energy Information Administrations still estimates coal production will pick up in the coming months. Based on its current estimate, the U.S production will reach a total of 1.026 billion of short tons in 2013, which is nearly 1% higher than the production in 2012. But the drop in production in the first few months of 2013 was also reflected in the performance of leading coal mining companies: In the first quarter of 2013, Arch Coal Inc (NYSE:ACI) sold 34.1 million of tons compared with 36.1 million of tons in the first quarter 2012 – a 5.5% drop; Cloud Peak Energy Inc. (NYSE:CLD) sold in 21.3 million of tons Q1 2013 compared with 22.9 million of tons in the same quarter in 2012, which represents a 7% decline (y-o-y). If the EIA will come through with its projections this could mean these companies will see a sharp rise in revenues as the year will progress.
Moreover, despite the drop in production these two companies still project their production will pick up and perhaps even reach the same production levels recorded in 2012: Arch Coal Inc (NYSE:ACI) sold in 2012 140.7 million of tons; the company expects to sell between 133 and 144 million of tons in 2013. Cloud Peak Energy Inc. (NYSE:CLD) sold in 2012 nearly 93 million tons. In 2013, it expects to sell between 88 and 92 million of tons.
Prices are falling
Another issue that steered away investors from these stocks is the drop in prices in the first quarter of 2013: the average realized price of coal for Cloud Peak Energy declined by 1.6% (y-o-y); the realized price of coal for Arch Coal Inc (NYSE:ACI) tumbled down by 15.8%. Moreover, the cost of production for Cloud Peak Energy Inc. (NYSE:CLD) increased by 6%. These factors led to the sharp fall in the profitability of these companies in the first quarter of 2013. Cloud Peak’s operating profit reached 10.2% in the first quarter 2013 compared with 12.6% in the same time frame of 2012. Meanwhile, Arch Coal Inc (NYSE:ACI) turned an operating loss in the first quarter.
Even if production will pick up in the coming months, the main concern will be the price of coal that might continue to fall in 2013. Two closely related factors, among many, are likely to affect the price of coal: the price of natural gas and the price of electricity.
Natural gas and electricity
The price of natural gas rallied in 2013 from its very low rate in 2012. The sharp rise in natural gas is likely to steer leading utility companies to use more coal over natural gas once their natural gas stockpiles deplete. The demand for electricity is another factor that could affect the price of coal. The EIA currently estimates electricity consumption will rise in 2013 by 1.2% (y-o-y). The rise in consumption for electricity and the shift from natural gas to coal explains why the EIA projects the coal consumption in the U.S will grow in 2013 by 7.3% (y-o-y). If coal consumption will pick up in the coming months, this will reflect in these coal companies revenues.
Another alternative for investing in coal
For those who wish to invest in a company that is only partly exposed to coal may consider CSX Corporation (NYSE:CSX), which is a railroad company. One of the company’s operations is transporting coal. The company is considered the largest coal transporter east of the Mississippi. Unlike the above mentioned companies, CSX Corporation (NYSE:CSX) has done well both in the stock market and with its financial performance: since the beginning of the year the company’s stock rallied by more than 32% (YTD). The company’s revenue in the first quarter of 2013 remained nearly unchanged, but its operating profitability rose to 29.5%. The company also offers a reasonable dividend with a 2.3% annual yield.
The bottom line
I still think that coal companies will make a comeback in the coming months, assuming of course the demand for electricity will increase compared to 2012. The high price of natural gas compared to 2012 is likely to keep utility companies slowly shifting back to coal.
The article Will Coal Companies Recover in 2013? originally appeared on Fool.com and is written by Lior Cohen.
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Lior 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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