Several U.S. coal producers are likely to tout strength from both thermal coal and metallurgical coal segments when they report third-quarter earnings as fundamentals in domestic markets catch up to recent strength in seaborne coal sales.

Indications of continued pricing strength in metallurgical coal markets and an improving outlook for domestic thermal coal bode well for U.S. coal producers approaching the earnings season. Still, several companies in the sector continue to struggle with their own operational issues and investor skepticism in a sector once again making headlines over bankruptcy filings.

"Overall, despite the negative sentiment and headlines, domestic coal fundamentals have outperformed even our more positive outlook," B. Riley FBR analyst Lucas Pipes wrote in an Oct. 18 note.

Multiple analysts have taken note that utility stockpiles of coal have been declining since 2012 highs and are now approaching more normal levels, potentially giving U.S. thermal coal miners negotiating power with their domestic customers.

"Utility buyers who have become complacent with high inventories and ample gas supplies haven't been in a market this close to balance in several years, so we will be watching to see not just price response, but also any lengthening of contract buying," MKM Partners Executive Director Daniel Scott wrote in an Oct. 11 note. "This improvement in domestic thermal coal outlook comes as exports and coking coal remain strong, and the net effect should be stronger results going forward for domestic players."

Positive indicators, including tight supply, led Seaport Global Securities analyst Mark Levin to raise price assumptions around global metallurgical coal trading in separate Oct. 15 notes maintaining Warrior Met Coal Inc.'s neutral rating and Ramaco Resources Inc.'s buy rating. Supply in the metallurgical coal space remains tight, he said, pointing to Peabody's challenges with its North Goonyella mine, the recent closure of Mission Coal Co. LLC's Pinnacle mine and logistical challenges in Australia.

"Over the long term, we continue to worry about the supply chain," Levin wrote. "Without the ability to hedge meaningful volume, it's not clear to us why boards will risk hundreds of millions of dollars on new met coal mine development."

Investors will get their first indications of how the sector has performed in the most recent quarter when Arch Coal Inc. reports its earnings results the morning of Oct. 23. The company operates both thermal and metallurgical coal mines in the U.S. Previewing upcoming results, Arch's balance sheet is in "excellent shape" and is poised to generate "significant sums of free cash flow," Seaport Global Securities analyst Mark Levin wrote in an Oct. 16 note.

U.S. Mine Safety and Health Administration data also hints at good news for Arch in the quarter. Levin pointed out that several of the company's metallurgical coal operations reported strong production in the third quarter compared to the second quarter. Additionally, despite Arch warning early in 2018 that it would be significantly cutting production guidance at its Black Thunder mine in the Powder River Basin, MSHA data shows the mine increased coal production 17.7% in the third quarter compared to the prior quarter.

Peabody Energy Corp., the largest coal company in the U.S., also increased production at its North Antelope Rochelle mine. The largest coal mine in the country, North Antelope Rochelle produced about 26.1 million tons of coal from the Powder River Basin in the third quarter, up from 21.4 million tons in the prior quarter when heavy rains hampered production at the mine.

However, investors eyeing Peabody's earnings report, expected Oct. 30, may be more tuned in to what is going on at North Goonyella, a metallurgical coal mine in Australia idled by a fire, and the recent acquisition of the Shoal Creek metallurgical coal property in Alabama. News of the fire pummeled Peabody's stock price, and while uncertainty around the event led at least one analyst to downgrade the company, others have said the fear-backed selloff of Peabody was overblown.

"Peabody Energy has been underperforming the group as investors question the company's operational performance and capital allocation priorities," Pipes wrote Oct. 18. "With the stock trading at 9.9% 2019 [free cash flow], we believe it is one of the most attractive stocks in the sector."

Cloud Peak Energy Inc., a pure-play Powder River Basin thermal coal producer, is expected to post a loss of 8 cents per share, according to an S&P Capital IQ normalized mean EPS estimate for the third quarter. Despite reporting success securing export deals, the company has struggled with lower shipments and increasingly challenging geological conditions at its operations.

In an Oct. 18 earnings preview, Pipes recommended investors buy Alliance Resource Partners LP and Consol Energy Inc. for the companies' exposure to improving fundamentals in the domestic coal market. With rising natural gas prices, declining utility stockpiles and strong export opportunities pulling tons out of the domestic market, Pipes said he believes that utility customers will find it increasingly difficult to buy coal at prices that offer coal companies profits below what producers can coax from seaborne markets.

Levin referred to Alliance and Consol's master limited partnership, CONSOL Coal Resources LP, as "two high-quality (and cheap) coal equities with big yields" in an Oct. 9 note praising the two partnerships, both of which have double-digit dividend yields. He said investors who are focused on "all of the met coal hubbub" have lost sight of strong names in the thermal coal space.

Other publicly traded, thermal coal-focused companies expected to report earnings in the coming weeks include Illinois Basin coal miners Foresight Energy LP and Hallador Energy Co.