Peabody Energy Corporation (BTU), CONSOL Energy Inc. (CNX): Will These Coal Companies Make a Comeback?

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Is the coal industry slowly making a comeback? Several coal companies such as Peabody Energy Corporation (NYSE:BTU) and CONSOL Energy Inc. (NYSE:CNX) have rallied in recent weeks:  Shares of Peabody increased by 10% during the past month; CONSOL’s stock rose by 16.8%. Despite this recent rise in the stock market, these companies are still down for the year. Will these companies continue to heat up?

Will revenue rise?

Peabody Energy Corporation (NYSE:BTU)In the second quarter, most coal companies didn’t increase their revenue: Peabody Energy Corporation (NYSE:BTU)’s revenue fell by nearly 13%; CONSOL Energy Inc. (NYSE:CNX)’s net sales plummeted by 16.4%. On the other hand, Alliance Resource Partners, L.P. (NASDAQ:ARLP) was able to pull its revenue up by 4.5%. The rise in sales was mostly driven by a 13.3% gain in coal sold (in tons), which was offset by the drop in coal prices.

In the coming months, in order to determine the potential growth in revenue at these companies, we will need to examine the demand for coal in the domestic and international markets.

Let’s start with the local market and the electricity market:

Demand for electricity is rising

The chart below shows the developments in the price of electricity in recent years.

Data Source: U.S Energy Information Administration

As seen above, the price is likely to keep rising in the coming months as part of a seasonal change. But will this summer be warmer than normal or last year?

During the year (up-to-date), the price of electricity has been roughly 1.6% higher than last year’s. This could have positively affected the demand for coal and natural gas in the first half of 2013.

Nonetheless, last year was one of the warmest summers in decades; the current projections are that this summer won’t be as warm as last year. Therefore, the price of electricity may be lower than last year’s in the coming months.

Other factors that could determine the domestic demand for coal are developments in the natural-gas market.

Natural-gas prices keep falling

Coal is mostly (90%) used in the U.S. in the power sector. Conversely, natural gas is an input in other sectors and the power sector accounts for nearly 40% of natural gas’ usage. In recent weeks the price of natural gas has tumbled; if the price continues this downward trend, it could lead to an increase demand for natural gas in the power sector as more utilities will use this commodity over coal.

Coal production and export

Based on the EIA, in the first half of 2013, coal production fell nearly 5% (year-over-year). Moreover, in the first five months of 2013, coal exports declined by 2.5% compared to the same time frame in 2012. If this trend continues, it could suggest coal exports won’t reach last year’s figures, which could also reflect in coal exports of leading coal companies.

Peabody Energy Corporation (NYSE:BTU)’s exports declined in past quarter and the company still estimates its exports will fall further in the near future on account of higher cost productions. The company doesn’t expect to sell higher coal volumes (tons): Last year’s coal sales (tons) reached 248.5 million. For this year, total sales are expected to be between 230 million and 250 million. If the company continues to sell at the current pace (based on the first two quarter of 2013), it may not reach this projection.

For 2013, Alliance Resource Partners, L.P. (NASDAQ:ARLP) projects its coal projection will rise by 13% to 14%. But if the price of coal remains lower than last year’s, it is likely to offset the company’s growth in sales for the rest of the year.

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