trending Market Intelligence /marketintelligence/en/news-insights/trending/0SJmv5dEhrQoIKZeOlM42Q2 content esgSubNav
In This List

US coal producers head into Q3'19 earnings season under dark clouds


Japan M&A By the Numbers: Q4 2023


See the Big Picture: Energy Transition in 2024


IR in Focus | Episode 10: Capital Markets Outlook


Infographic: The Big Picture 2024 – Energy Transition Outlook

US coal producers head into Q3'19 earnings season under dark clouds

Bad news for coal investors dominated headlines in recent weeks as more power plant retirements in the U.S. and reduced appetite for coal exports spurred bankruptcies and mine closures ahead of the sector's third-quarter earnings reports.

Alliance Resource Partners LP is the only top-five coal company by market capitalization expected to report higher EPS in the third quarter on a quarterly basis, an S&P Global Market Intelligence analysis of estimates showed. All five of the largest U.S. coal companies by market capitalization are expected to report lower EPS on an annual basis.

SNL Image

The U.S. coal sector has been in a long secular decline as the industry's top customer, domestic utilities, continues to shift away from coal-fired power generation due to the abundance of cheap natural gas and renewable energy resources. Producers have moved tons into favorable export markets in the last few years, but demand abroad for both thermal and metallurgical coal has weakened in recent weeks. Now, coal that had been heading overseas may be forced to compete in a shrinking domestic market.

"This quarter our outlook for thermal coal, both domestically and seaborne, remains challenged," Clarksons Platou Securities analyst Daniel Scott wrote in an Oct. 18 earnings preview. "Third quarter covers the bulk of summer burn season, and summer burns across the globe in general were uninspiring. Domestically, natural gas remaining below $2.50/Mcf has remained a challenge to all basins, and inventories still aren't to levels that drive utility buyers back into the market."

As an example of how comfortable utilities remain around being able to secure supply, Scott pointed to the recent and sudden closures of Blackjewel LLC's Eagle Butte and Belle Ayr mines. Despite being two of the largest coal mines in the U.S., the closure of the Powder River Basin mines due to the failure of an initial bankruptcy financing proposal did little to move the needle on coal prices.

"We expect investors to focus on the risk of the domestic market reabsorbing tons that were exported this year, although we are starting to see mines close in response to market conditions," Scott wrote.

In recent weeks, Moody's Investors Service predicted that closures were in store for Powder River Basin coal producers. Similarly, analysts have been watching the metallurgical coal market for further mine closures among higher-cost producers. While metallurgical coal prices took a dip in the third quarter, Seaport Global Securities LLC analyst Mark Levin suggested the market may have finally bottomed as prices began to rise again in October.

"Met coal prices declined sharply during the third quarter due to Chinese port restrictions starting in July in addition to weak demand from Europe and South America," B. Riley FBR analyst Lucas Pipes wrote in an Oct. 17 note. "Equities of met coal producers under our coverage experienced significant selling pressure, creating additional attractive entry points for investors with longer time horizons."

Pipes said he is watching for updates on the smattering of metallurgical coal growth projects announced in recent months. He also is "carefully listening" for whether producers layout plans to curtail production volumes if recent weakness in the metallurgical coal market continues.

Privately held producers Murray Energy Corp. and Blackhawk Mining LLC already announced decisions to idle metallurgical coal operations in recent weeks.

"Potential production curtailments are a likely topic during question and answer sessions in this upcoming earnings season, as some U.S. producers are at the higher end of the global cost curve," Pipes wrote. "While we do not expect curtailment announcements during this earnings season, we will be looking for any indication of plans to do so in the event that this cyclical downturn lasts longer than expected."

Third-quarter earnings reports for the coal sector will kick off with an Oct. 22 report and earnings call from Arch Coal Inc. The company is a major producer of thermal coal from the Powder River Basin and has a significant presence in the U.S. metallurgical coal space. The company recently announced a joint venture of its western U.S. coal operations with Peabody Energy Corp., which is scheduled to report earnings results Oct. 29.

Scott picked Arch Coal and pure-play metallurgical coal producer Warrior Met Coal Inc. as favorites for long-range investments in the coal space.