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Arch Coal Inc (ACI), Peabody Energy Corporation (BTU): Will Coal Make a Comeback in 2013?

Major coal mining companies haven’t performed well in recent years. Perhaps the recent increase in the price of natural gas will help rally the coal industry: Since the price of natural gas didn’t reach the low prices it did back in 2012, this should raise the demand for coal in the electricity industry. Will the recent rally in the price of natural gas help raise the revenues of leading coal mining companies in 2013?

Production remains low in 2013

According to the EIA report, total U.S production at the beginning of 2013 is much lower than the production recorded during 2012 and 2011. During February 2013, the production was 10.6% below the production in 2012 and 10.4% below the production in 2011. If the production will continue to dwindle, it is likely to pull down the revenues of leading coal companies. This decline is likely to reflect in the shares of leading coal mining companies.

Year-to-date, shares of Arch Coal Inc (NYSE:ACI) have declined by more than 21%; shares of Peabody Energy Corporation (NYSE:BTU) also tumbled by 16%.

These companies didn’t perform well in 2012. If they don’t become profitable, their stocks are likely to fall further. During 2012, Arch Coal Inc (NYSE:ACI) recorded a 3% drop in revenues compared to 2011. Peabody Energy Corporation (NYSE:BTU) had a 2.3% rise in revenues. For Arch Coal Inc (NYSE:ACI), the decline in revenues was mainly due to the 11.4% drop in tons sold. For Peabody Energy Corporation (NYSE:BTU) the rise in revenuers was because of 6.5% gain in price of coal sold in the U.S and came despite a 0.4% drop in tons sold.

Arch Coal Inc (NYSE:ACI)’s operating margin fell from an 8% gain in 2011 to a 17% loss in 2012. One of the reasons for the sharp drop in profitability was related to one-time provisions: $346 million for goodwill provision and $523 million costs related to closed operations of Arch Coal’s Appalachia mines. After adjusting for these provisions the company’s profit margin rises to 6% in 2012, which is still lower than the profit margin in 2011.

Peabody Energy Corporation (NYSE:BTU) also had one-time provisions that pulled down the company’s profit margin in 2012. After controlling for these one-time provisions related to asset impairment and mine closure costs, the company’s profit margin rises from 2% to 15%. Alas, this profit margin is still lower than 2011.

At least both of these companies offer a reasonable dividend, coming out to a 1.6% annual yield for Peabody and 2.2% for Arch Coal.

Not all coal companies are struggling: Shares of Natural Resource Partners LP (NYSE:NRP) have spiked by over 22% since the beginning of the year. Its high dividend yield the of over 9.7% is one of the main benefits to owning this stock. Keep in mind, however, this company isn’t a coal producer. It owns coal, aggregate and oil and gas reserves in the U.S. It leases its properties in exchange for royalty payments. This arrangement reduces the company’s risk related to coal mining and thus enables it to reach higher profit margins. In 2012 the company’s operating profitability reached 70%.

Let’s examine what is up ahead for the coal industry and its relation to natural gas.

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