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Sending coal abroad, cash to investors dominates coal earnings calls in Q1

Improved export opportunities and a focus on returning capital to shareholders in lieu of investment in volume growth were at the heart of most U.S. coal companies' conversations with investors in the first quarter.

Coal producers continued to benefit from a robust demand for seaborne coal destined for steelmaking and utility facilities. Despite the Trump administration promising to bring back coal, a secular decline in the sector has left many investors focused on the companies that are best poised to execute deals outside of the U.S. utility market, even as some coal companies report their customers' largest power plant retirements have been completed, at least for now.

"More constructive regulations are positive on the margin, but do not appear likely to change the utility coal demand picture much, if at all," Seaport Global Securities LLC wrote in an investment themes report published May 17. "There are still likely to be no additional coal plants built in the U.S. with more retirements likely."

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The notion that the best use of free cash flow is repurchasing shares in a company's own stock has been a hot topic in the sector, particularly among the companies that recently emerged from bankruptcy reorganization.

Peabody Energy Corp., the largest U.S.-based coal company, opened the first-quarter earnings season reporting higher coal sales and revenues than the year-ago period and net income attributable to shareholders of $106.6 million. The company also announced it had doubled down on a share buyback program, bringing its total authorization to $1 billion.

"We consider Peabody to be a highly compelling investment and one of the reasons we continue to invest in the company through our share purchase program," Peabody President and CEO Glenn Kellow said on an April 25 earnings call.

Arch Coal Inc., with a large thermal coal platform driven by its Powder River Basin operations and metallurgical coal mines in the eastern U.S., also has focused on shareholder return initiatives in communications with investors. In a May presentation, Arch CEO John Eaves noted that $375 million, or about 97% of free cash flow, has been returned to shareholders since the company began its capital return program in May 2017.

However, in the first quarter, the company also reported several geological and logistical challenges contributing to an increase in costs alongside a major cut in planned production at its biggest thermal coal mine in the Powder River Basin. The company's stock plummeted the day it hosted an earnings call with analysts and, as of May 17, had not yet recovered.

Alliance Resource Partners LP, the largest coal company by market capitalization to avoid the recent wave of bankruptcy reorganizations, is expected by some analysts to execute its own buyback program soon. Alliance President and CEO Joseph Craft III said the company is also looking at investing in opportunities to capture export market potential and is optimistic about coal markets for the remainder of the year.

"[Alliance's] strong performance to start the year bodes well for the balance of 2018," Craft said. "I am equally optimistic about our future and our ability to grow our cash flow as we increase production and reap the growing benefits from our noncoal investments."

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Pure-play Powder River Basin coal producer Cloud Peak Energy Inc. told investors that U.S. thermal coal pricing remained weak but said customers in Asia had shown a strong interest.

The quarter has been beneficial for some of the smaller U.S. coal companies as well.

A relatively new publicly traded U.S. coal producer focused on metallurgical coal, Ramaco Resources Inc., reported its first profitable quarter. Corsa Coal Corp., another metallurgical coal producer, said it was bucking the trend of focusing on returning cash to shareholders instead of growing its production volume to take advantage of demand for U.S. metallurgical coal. Warrior Met Coal Inc., an Alabama-based metallurgical coal miner, reported record production and sales volumes from its mines in the quarter.

Consol Energy Inc., which produces thermal and metallurgical coal from its Pennsylvania mining complex, reported that demand for coal abroad was so strong, America's long-term role as a swing supplier was beginning to shift to that of a more steady source of seaborne coal.