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Coal execs find reprieve in 2017, sparking hope for next year's prospects


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Coal execs find reprieve in 2017, sparking hope for next year's prospects

SNL Image

President Donald Trump, left, reaches out to shake hands with West Virginia Gov. Jim Justice, a businessman who ran several coal mines before becoming governor.

Source: Associated Press

As U.S. coal companies prepare to close the book on 2017, executives have had a lot more positive news to share with investors compared to prior years fraught with bankruptcies and crashing markets.

President Donald Trump took office just as coal markets had begun to recover and some of the largest companies to succumb to bankruptcy were starting to operate under significantly improved balance sheets. Optimism from the stabilization and transformation of the coal industry could be heard in executives' communication with investors as, for the first time in a couple of years, the sector was finding reasons to be excited about its near-term prospects.

S&P Global Market Intelligence listened to a wide range of coal earnings calls over the past year and compiled some of those comments. The standout quotes are in italics below.

"It feels good to be back," Arch Coal Inc. John Eaves told analysts on a February earnings call following the company's emergence from bankruptcy. "The restructuring has fundamentally reshaped our balance sheet, cut our debt and interest expense to fractions of what they were prior to Chapter 11 process, and eliminated a number of other burdensome drags on our performance. We're a dramatically stronger company today as a result."

Back on the stock market and free of much of its previous heavy debt load, Peabody Energy Corp. touted the strength of the restructured company and assured investors the sector had learned the lessons from "scars" gained in the downturn and would eschew a focus on growing production volumes.

"Now our job is to return to shareholders over time," Peabody President and CEO Glenn Kellow said in May. "So that's the filter. I'd rather talk about the things we're going to do because they're going to be constrained by that filter. And basically, we're not going to do anything else."

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Knight Hawk's Totem Kole II barge sits on the Mississippi River where it moves coal from the company's nearby Illinois Basin coal mine.

Source: S&P Global Market Intelligence

By the company's second-quarter report in August, Peabody had taken major action to improve its balance sheet and Kellow said the company was "not about to hit pause." In addition to cleaner balance sheets, the coal industry was also seeing improvements in domestic and international markets lifting spirits as the coal-friendly Trump administration began to tick off items on the sector's wishlist.

"Longer term, we are hopeful that the Trump administration will work to reduce the overreaching regulatory burden that has plagued the coal industry for the last eight years and protect the existing fleet of coal-fired generating power plants," Alliance Resource Partners LP President and CEO Joseph Craft said. "A return to more rational environmental and energy policies should provide clarity and stability to the coal markets and potentially set the stage for growing coal demand in the future."

Cloud Peak Energy Inc. President and CEO Colin Marshall noted that while early actions taken by the Trump administration were helpful, the industry would need to work with the administration on longer-term solutions if it wants to keep its customers around.

"The first goal will be to establish an environment where utilities have the regulatory certainty they need to stop closing coal plants and then to consider building new ones," Marshall said in April. "Given the long-term nature of such decisions, achieving this will not be easy."

Looking forward

In the third quarter, many coal companies were projecting 2018 would look a lot like 2017 — roughly flat in terms of demand. The key factor to watch, as Kellow told analysts, will be weather and natural gas prices.

"For an early glimpse of 2018, we estimate U.S. utility demand to be largely stable with about 20 million tons of reduced coal demand expected from plant retirements which will largely be offset by higher capacity utilization from a nationwide coal fleet that this year is running at just over 50% utilization," Kellow said.

Eaves said that while the thermal side of the coal business remains in a recovery mood, there's reason for optimism. He was more bullish on the metallurgical coal market, which he believes is in a "relatively healthy balance at present." He predicts 2018 will be "another strong year of value creation."

"Looking ahead, we believe that resurgent steel markets, strengthening Chinese manufacturing activity and a strong global economic outlook should translate into another constructive year in met markets in 2018," Eaves said. "Moreover, we believe that most of the new production capacity ... carries a high cost structure, which should support strong pricing over time."

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U.S. Environmental Protection Agency Administrator Scott Pruitt holds up a hard hat he was given during a visit to a coal mine in Pennsylvania.

Source: Associated Press

Robert Moore, president and CEO of Foresight Energy LP, suggested near the end of 2017 that thermal coal production remains in oversupply in certain regions, indicating producers may need to see more rationalization of supply unless demand increases in the near future.

"We continue to see lackluster demand for most of our electric utility customers as well as a shift in their procurement practices as they move away from longer-term coal positions toward shorter-term and spot purchase positions," Moore said. "However, we continue to work closely with our customers to provide thoughtful solutions to the challenges that they continue to encounter in dispatching their electric generation against subsidized renewable energy and cheap natural gas."

Craft said that while Alliance is planning for demand to be roughly flat next year compared to 2017, he believes there will be some opportunity for pricing improvement in 2018 and capturing more sales volume.

"Exports have played a major role in supporting U.S. coal prices in 2017 and it appears domestic markets have bottomed as coal prices have rebounded off very low levels," Craft said. "We continue to believe higher-cost production will eventually come out of the market, providing further support for improving coal prices."