
| Ohio coal Source: Associated Press |
Most U.S. coal companies reported a solid 2017 in the recent round of earnings reports but said they must continue to adapt to changing markets in 2018.
The sector saw a vast improvement in the market for coal through much of the year, particularly exports and metallurgical coal used for steelmaking. The year also saw some of the largest players shift their focus from volume growth to returning profits to their shareholders. However, metallurgical coal prices are expected to moderate and thermal coal producers continue to face a declining market at home as coal plants retire.
"As for coal equities in general, our sense is that investors remain cautiously optimistic toward met coal-levered names, albeit with increasing trepidation due to recent Chinese steel price weakness and yesterday's big fall in the benchmark coking coal price," Seaport Global Securities analyst Mark Levin wrote in a March 13 note. "In short, we remain generally constructive toward coal equities given our view that valuations are reasonable, balance sheets are strong, [free cash flow] yields are attractive and supply additions are relatively limited."
The S&P Global Platts spot Australian premium low-vol price fell $14 per tonne March 12, the largest one-day decline since May 2017.
Peabody Energy Corp., the largest coal company in the U.S, saw an 80% increase in its share price since emerging from bankruptcy in April 2017 as revenues received an 18% boost due to robust seaborne coal pricing and higher demand in the U.S. The company has touted deleveraging and shareholder return initiatives throughout the year, selling investors on a Peabody that is keeping a close eye on its balance sheet. In 2017, the company reported its highest adjusted EBITDA since 2012.
While Peabody is working on life extensions for its Australian thermal coal mines and considering upgrades to its Australian metallurgical coal mines, in the U.S., it is largely focused on holding on to utility customers and maximizing returns in the face of natural gas competition. The company said that in 2018, changes in electric power consumption will continue to be driven by low natural gas prices and the availability of renewable energy.
Arch Coal Inc., another producer recently reorganized through a bankruptcy, also reported solid results in its recent earnings report. Like Peabody, the company has also touted initiatives to return cash to shareholders, said it is looking to export opportunities and has expressed caution on deploying any capital or considering any M&A activity.
The company, with both a large eastern metallurgical coal platform and significant thermal coal production in the Powder River Basin, reported net income of $81.3 million in the fourth quarter of 2017, a 143.4% increase from the amount reported in the fourth quarter of 2016.
Arch CEO John Eaves also cheered improved markets, the benefits of tax reform and a streamlined mining portfolio on a Feb. 13 call with analysts.
"In short, it has been an exceptional year for the company and we believe that we've set the stage for continued strength and progress in the future," Eaves said.
Export outlet boosting coal
After a weak first half in coal pricing, Alliance Resource Partners LP President and CEO Joseph Craft said on a recent call that it appears coal pricing bottomed in the back half of 2017 and continues to show signs of improvement.
The eastern U.S. thermal coal producer recently expanded its presence in international thermal and metallurgical coal markets. Those opportunities to sell into export markets are expected to continue, Craft said, adding that the company is considering M&A activity in the metallurgical coal space, though nothing is anticipated yet for 2018.
Cloud Peak Energy Inc. President and CEO Colin Marshall said the Powder River Basin coal producer was looking to improving demand for coal abroad and was booking deals at solid prices, but added that domestic utilities appear to still "not feel any urgency to contract additional tons for delivery this year."
Challenging domestic thermal coal markets also pushed Foresight Energy LP to export markets for relief in 2017, Foresight CEO Robert Moore recently said. He said electric utilities in the U.S. appear comfortable with their coal inventory levels as low natural gas prices keep a lid on new demand.
Exports have also left Pennsylvania-based metallurgical and thermal coal producer CONSOL Coal Resources LP in "very good shape" heading into 2018, CEO Jimmy Brock said on the company's earnings call. He noted the company secured multiyear contracts for coal exports that would help to stabilize future revenues, and another executive said he expects that strong pricing will drive more exports in 2018.
In a recent note, B. Riley FBR Inc. analyst Lucas Pipes wrote that seaborne thermal coal prices have begun to slide over the last few weeks. Still, he said, most U.S. thermal coal exports remain economical and port capacity to accommodate coal exports is sufficient.
"The strong export market has been critical in supporting the domestic market ... absorbing excess tonnage and often creating a price floor for domestic producers," Pipes said.
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