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Blackjewel purchase of Contura assets adds to uncertainty in Powder River Basin

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The Eagle Butte mine in Wyoming in September. Contura Energy Inc. sold this mine and its Belle Ayr mine to a company affiliated with Revelation Energy LLC.

Source: S&P Global Market Intelligence

A number of analysts have called for consolidation among coal producers in the Powder River Basin, but the purchase of Contura Energy Inc.'s mines by Blackjewel LLC takes the opposite tack, further fragmenting the producer base, according to industry observers.

"You're looking for discipline [in the Powder River Basin, or PRB] as opposed to some unknown coming in and just taking matters into his own hands," William Wolf, vice president of business and market analysis at John T. Boyd Co., told S&P Global Market Intelligence. He expressed concern that the new owner "is going to ramp up production and get additional tons and god knows what that will do to the pricing out there."

According to company CEO Jeff Hoops, Blackjewel is affiliated with Revelation Energy LLC, with the companies sharing some common ownership. Hoops is CEO of both companies.

On Dec. 11, Contura announced the sale of its Eagle Butte and Belle Ayr mines along with related reserves, equipment, infrastructure and other properties to Blackjewel for deferred consideration of up to $50 million. The sale eliminated about $200 million in undiscounted reclamation obligations for Contura.

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Source: S&P Global Market Intelligence

Wolf said Hoops has been a Central Appalachia producer all his life. "It's interesting that somebody from the east would be getting into the west," he said. "It's sort of an introduction of a person that's not familiar in that basin."

In the third quarter, Eagle Butte and Belle Ayr each produced about 4.5 million tons of coal, a year-over-year decline for both. According to data compiled by the U.S. Mine Safety and Health Administration, Belle Ayr produced 14.9 million tons in 2016 and 18.3 million tons in 2015, while Eagle Butte produced 19 million tons in 2016 and 19.6 million tons in 2015.

Revelation recently reached an agreement to acquire the Lone Mountain coal complex as well as nearby Central Appalachian properties from Arch Coal Inc. in the Virginia-Kentucky border area.

Steve Piper, director of energy research with S&P Global Market Intelligence, agreed that a "hunker-down thesis makes sense" for the PRB. He said the sale does not look like a consolidation play and it is difficult to pick out the story behind it, although he speculated it could have to do with Contura's decision in June to withdraw a lease application for an expansion at the Belle Ayr mine.

Blackjewel could still choose to go after the lease, Piper said.

"[Blackjewel] still has a few years of good contract opportunities and a fairly sustainable market to work off of," he added, but much of the success of the assets will likely depend on gas prices.

"The fundamentals for coal are a little bit better in 2017, but the long-term picture is still pretty murky," he said. "If, turning to the gas side of things, exports pick up and you have some upwards pressure on natural gas — sustainable pricing in the $3.25 parts per million Btu range the returns to PRB will probably still be pretty good. But there's a risk you could end up in a sub-$3 market and then you just get a situation where PRB premium competes directly with PRB discounted, and things could get rough."

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In its news release announcing the sale, Contura said it will now focus on its remaining assets in the Central and Northern Appalachian basins. Piper said the metallurgical market has been good over the past year and looks fairly sustainable, but the market is still somewhat risky.

"The U.S. is really at the end of the global value chain as far as met properties go. In a flat to declining market, if that becomes the case, U.S. volumes are usually the first to get turned away. That market continues to be potentially pretty volatile for U.S. producers not withstanding a fairly stable market over the last year or so," he said.

Piper said Contura's move to sell some of its major assets right out of bankruptcy sends a bearish signal about the market.

Contura reported a net income of $10.2 million in the third quarter of 2017 and is working to buy back up to $31.8 million of its common stock, with an extended deadline of Dec. 15. It withdrew a planned initial public offering in August, saying market conditions would undervalue the company.