|Ramaco Resources Inc. is one of the few companies developing coal mines in the U.S. as competitors have favored sending cash back to shareholders. The company's Berwind project is a metallurgical coal mine on the border of Virginia and West Virginia. |
Source: Ramaco Resources
U.S. coal companies have long struggled to match supply to declining demand, and executives remain cautious with the company wallet even as improved export markets offer an outlet for their product.
A few growth stories coming from smaller producers are largely overshadowed by plans to send capital to shareholders instead of new coal mining projects. Coal executives said that while demand for coal in places like India and Turkey are providing hope for new export opportunities, the larger domestic market continues to offer relatively weak pricing as power plant retirements continue.
S&P Global Market Intelligence listened to a wide range of coal earnings calls over the past quarter and compiled some of those comments. The standout quotes are in italics below.
Returning value to shareholders
With relatively little debt eating up cash flow post-bankruptcy reorganization, many of the largest U.S. coal companies are repurchasing their own shares or paying out dividends instead of defaulting to spending on coal volume growth. Peabody Energy Corp., the largest coal company in the nation, literally doubled down on that strategy with the announcement its share buyback program authorization was increased from $500 million to $1 billion. Peabody CFO Amy Schwetz made it clear on the company's earnings call that the program was not going to be one that sits on the shelf.
"Capital returns to shareholders are probably going to be our largest nonoperating-related use of cash over the course of the year," Schwetz said. "That will be a shift from last year where we were more focused on debt reduction."
Arch Coal Inc. recently noted as much as 97% of its free cash flow had been returned to investors since May of last year. On Consol Energy Inc.'s earnings call, Executive Vice President and CFO David Khani said there has been a similar trend toward limiting production of natural gas as shareholders steer company management to raise returns and generate free cash flow instead.
"The stock performance of companies that generate free cash flow are outperforming companies that outspend their cash flows. This trend has been overlaid onto the coal space as well, forcing most of the coal companies to return capital instead of just investing in growth," Khani said. "This trend towards investment discipline, along with rising domestic and export demand, provides daylight for supporting healthier natural gas prices."
Walter Scheller, the CEO of Warrior Met Coal Inc., a company that was formed from assets out of Walter Energy Inc.'s bankruptcy reorganization, said the company is benefiting from the current market but is preparing itself in case the recent trend goes south.
"We run the business as if the next pricing downturn is just around the corner, with conservative targets and flexible operations to adjust to the market environment as it changes throughout the year," Scheller said.
Exports relieve weak domestic environment
Many coal companies continued to report success from tapping into a rise in seaborne demand for both thermal and metallurgical coal in recent months.
"The export market is still very constructive for us as an option," Alliance Resource Partners LP CEO Joseph Craft III said. "And we can still make nice margins by participating in that, and that's why we're bringing up another 1 million tons of production this year, to be able to increase our cash flow by participating primarily in the export market."
Utility customers in the U.S., however, are still not rushing to buy coal. Cloud Peak Energy Inc. President and CEO Colin Marshall said he is optimistic the "rapid rate" of power plant retirements is slowing down, but for now, supply and demand in that market have not reached an equilibrium and utilities are comfortable they can buy coal and gas when they are ready without worrying much about price.
"We're optimistic there will actually be some demand, they'll actually be caught out a little bit," Marshall said. "But until that occurs, it's pretty easy to sit back and take whichever is most opportune and realistic on short notice. And so our market, the whole business has changed and we're having to adapt to that."
Lowering supply, some unintentionally
While some coal companies like Ramaco Resources Inc. and Corsa Coal Corp. are actively building out and expanding production, most are holding off on any major expansion. Arch Coal significantly cut back production at its large Black Thunder thermal coal mine in the Powder River Basin. The company also encountered geological issues within its metallurgical coal segment in the East that affected production costs. Those geological issues, combined with logistical challenges, "acted to dampen otherwise strong financial performance," CEO John Eaves said.
"We operate in a highly complex business environment, which can lead to a significant degree of variability in our quarterly results," Eaves said. "The first quarter 2018 was no exception."
Not overreacting to the boom in export demand could be critical to the health of today's U.S. coal companies. Responding to an analyst question about replacing supply lost from a mine shut down in the wake of a fire, Foresight Energy LP President and CEO Robert Moore said the company has no such plans.
"The last thing we want to see is people out there not being as disciplined as they should be," Moore said. "It's a volatile domestic market, and as, I think, we all know from experience, the export markets can come and go."