
Steam spews from the quench tower of a coking plant in Indiana. A recent improvement in demand for coal used to make steel has driven renewed interest in coal equities. S&P Global Market Intelligence |
With many in the coal sector once again turning a profit, large investors are selectively placing, or in some cases withdrawing, large bets on U.S. coal producers.
Many of the largest holders of coal equities are hedge funds, a group Mark Levin of Seaport Global Securities LLC recently said is "more times than not" a group with more short-term trading bias compared to long-only funds. He wrote in early November that, anecdotally, it seemed like long-only interest in coal companies had "picked up in recent months, but not a whole lot."
"Long-only participation is important," Levin wrote. "There tends to be more volatility without their participation. The good news is that coal equities have an enormous opportunity. Why? Coal is under-owned by a group that has significantly more assets/buying power than hedge funds."
S&P Global Market Intelligence data shows hedge fund managers own about 34.9% of the outstanding shares of Peabody Energy Corp., the largest coal company in the U.S. About 36.4% of outstanding shares of Peabody are held by those classified as traditional investment managers. Elliot Management Corp. reported holding 20.1% of Peabody's outstanding shares, while The Vanguard Group Inc. held another 7.0%.
About 20.4% of Arch Coal Inc.'s outstanding shares are held by groups classified as hedge funds, and about 84.7% of outstanding shares were reportedly held by those classified as traditional investment managers. Oppenheimer Funds Inc., one of the largest holders of U.S. coal equities, reported a holding of about 15.0% of Arch's outstanding shares.
According to an S&P Global Market Intelligence analysis, the top 10 holders of public companies saw a median quarter-over-quarter increase in market value of coal positions of about 91.8% from the second quarter to the third quarter.
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Oppenheimer went from holding six investment positions in U.S. coal companies to holding 10 positions, increasing the market value of its public coal holdings 110.6% from $232.2 million to $489.1 million. Other top investors in coal, including Monarch Alternative Capital LP, First Trust Advisors LP, Vanguard Group Inc. and BlackRock Inc. saw the market value of their coal holdings rise from improved stock prices, an increase in investment positions or both. Neuberger & Berman LP grew their position the most percentage-wise, with a 123.0% increase in the market value of its U.S. coal position.
In a Dec. 13 note, MKM Partners Executive Director Daniel Scott said coal stocks have shown strong price performance since early summer, largely because coal buyers have been forced back into the market after they "stayed on the sidelines" when Cyclone Debbie in Australia caused a price spike in June. The improved market for coking coal has "fueled a run in the equities," he wrote.

The largest net positive change in shares held from the second quarter to the third came from Platinum Investment Management Ltd. picking up 2.6 million shares of Peabody Energy for a new stake of 2.6% of Peabody's outstanding shares. Laurion Capital Management LP picked up 2.3 million shares, increasing its total holdings to 2.7% of Peabody's outstanding shares.
Each of the largest public coal companies saw at least one institutional investor exit its stake, with the largest exit by share count being Luminus Management LLC's sale of 1.0 million shares of Cloud Peak Energy Inc. The largest net sale in the period was PointState Capital LP's trade of 3.3 million shares of Peabody.
In a Dec. 5 note, Levin wrote that many coal stocks look like a pretty good value given current futures pricing. He said to watch for producers and customers increasing hedging in the metallurgical coal trade. If earnings volatility is reduced, he said, that could boost coal companies' valuation measures. While most investors in the coal space have focused on metallurgical coal, Levin wrote there are some good potential investments in thermal coal being overlooked.
"From our client interactions, one thing remains clear: investors don't seem to care much about utility coal. Valuations bear this out," he said, adding that quality thermal coal producing companies such as Alliance Resource Partners LP and CONSOL Energy Inc. have enterprise value to EBITDA multiples of just 4.5x and 3.1x, respectively, despite free cash flow yields of 16% and 26%, respectively.
"What will it take for investors to refocus on the industry's best utility coal producers, the sure survivors? A grid reliability rule?" Levin wrote. "Would natural gas prices above $3.50/MMBtu create a buzz? It's hard to say, but it would definitely help coal burn across the U.S. At some point, we imagine someone will notice."

