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Q4'19 earnings likely another rough period for US coal companies

Fourth-quarter 2019 earnings reports are likely to be rough on U.S. coal producers yet again when miners begin reporting results over the next few weeks.

Every major U.S. coal company is expected to report earnings per share for the period that are either worse than the prior quarter or year-ago quarter, an S&P Global Market Intelligence analysis of analyst forecasts shows. For many producers, quarterly EPS will be worse compared to both periods.

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Moody's Investors Service recently said it expected EBITDA across its rated portfolio of U.S.-based coal companies to fall by about one-third. Deterioration in coal export volumes will likely lead to even lower cash flow in 2020, Moody's added in its recent report, reiterating its negative outlook on the sector.

"We anticipate that companies in their year-end earnings calls will outline steps they are taking to continue to generate positive free cash flow and navigate weak market conditions," Moody's said. "While coal companies have not reported earnings for the fourth quarter of 2019, CSX Corp., which is more tied to exports than some other railroads, reported a 17% drop in coal volumes for the fourth quarter, and expects a 14% drop in coal revenue in 2020."

China largely withdrew from the global coal market in the latter part of 2019, Daniel Scott, managing director of equity research with Clarksons Platou Securities, wrote in a Jan. 15 note. This led metallurgical coal pricing to fall to multiyear lows before rallying to just over $150 per ton, with more room to grow, Scott noted. So, while many producers are hoping metallurgical coal prices will lift earnings in 2020, the fourth-quarter 2019 results are not likely to shine.

"There could be a slowdown later this month with the Chinese New Year, but overall we expect a more stable market compared to last year," Scott wrote.

Ramaco Resources Inc. Executive Chairman Randall Atkins recently told S&P Global Market Intelligence that he would expect most metallurgical coal companies to surprise investors to the downside for the fourth quarter of 2019. Despite expected weakness in the earnings results, Scott recommended that investors own a basket of coal companies with exposure to metallurgical coal, specifically names such as Ramaco, Warrior Met Coal Inc. and Arch Coal Inc., that "should outperform the rest of the coal space given a rally in benchmark pricing."

Peabody Energy Corp. and Arch Coal, two of the largest miners in the U.S. by volume with exposure to both metallurgical and thermal coal, are expected to report a loss to shareholders for the fourth quarter of 2019. Thermal coal producer Hallador Energy Co. and increasingly metallurgical coal-focused Contura Energy Inc. are also expected to report negative EPS for the period.

Alliance Resource Partners LP, a company that has stood out as a relative success against other struggling coal producers, particularly given its thermal coal footprint, is expected to report EPS of 22 cents for the fourth quarter of 2019. The company has steadily grown to be the largest coal producer in the U.S. by market capitalization, which totaled $1.39 billion as of the end of the recent period.

Alliance is scheduled to be the first U.S. coal company to report results Jan. 27.