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Cloud Peak focused on overseas coal sales despite tight port capacity

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The entrance to Cloud Peak Energy Inc.'s Antelope mine in the Powder River Basin. Cloud Peak is making international trade agreements but faces tight port capacity.

Source: S&P Global Market Intelligence

Cloud Peak Energy Inc. is focusing on international markets and the prospect of diminishing utility stockpiles for future coal sales, as limited port capacity and potentially low gas prices threaten 2018 production levels.

The coal producer reported a net income of $17.8 million in the fourth quarter of 2017, a 27.2% drop from the $24.5 million reported in the last quarter of 2016.

CEO Colin Marshall recently said that the company's only option for real growth lies in international markets due to gradually diminishing domestic demand, but Western coal producers are limited by current export capacity at terminals in California and British Columbia.

The coal producer signed an agreement with Jera Trading Singapore Pte. Ltd. in January to supply up to 1 million tons of coal per year to two new integrated coal gasification combined-cycle coal-fired power plants near Fukushima, Japan. Marshall said on a Feb. 15 earnings call that while the agreement is for 40 months, "our expectation is that this will be the start of a long-term supply partnership."

Marshall said Cloud Peak extended its rail and port agreements with BNSF Railway Co. and Westshore Terminals LP in Vancouver, British Columbia, through the end of 2020, resulting in "a reduction in the annual take-or-pay commitment."

Cloud Peak expects to ship 5.5 million tons overseas in 2018 — the maximum amount feasible at current port capacity and has already sold 2.5 million tons.

"At the moment, port capacity is in short supply, and our focus is on making sure we fill that 5.5 million [tons] with the best-quality contracts we can," Marshall said.

He said higher volumes were a problem for the producer around 2015 and 2016 when coal prices dropped, forcing Cloud Peak to make payments to BNSF and Westshore to eliminate its volume obligations to the railroads.

For 2018, Cloud Peak estimates coal shipments of 52 million tons to 56 million tons, with committed sales at fixed prices of about 45 million tons. Adjusted EBITDA is forecast between $75 million and $100 million, while capital expenditures are predicted in the range of $15 million to $25 million.

These numbers represent a small drop from the 57.4 million tons sold in 2017 and the 58.5 million tons sold in 2016. The segment adjusted EBITDA in 2017 was $142.8 million.

Analysts from B. Riley FBR Inc. said the EBITDA for 2018 was lower than their expectations of $122 million. They maintained a neutral rating with a price target of $4 in a Feb. 16 note.

Seaport Global Securities LLC analysts also maintained a neutral rating, according to a Feb. 16 note that expected shares to trade down that day due to lower-than expected guidance.

Marshall said the guidance assumes natural gas prices between $2.50/Mcf and $3/Mcf. Analysts have predicted coal producers could suffer at the low end of that range, but Marshall suggested that $2.50/Mcf is sustainable.

"Once it gets down towards $2, as it did in 2016, that clearly decreases burn. Much above $2.50, we feel like most of our coal is burned," he said. "With plenty of winter left, we are optimistic that stockpiles will be drawn down enough to increase utility spring buying for 2018 delivery."

Looking down the road, Marshall said he believes the legal challenges to an expanded lease area for its Antelope mine in Wyoming are "without merit" and that Cloud Peak will be able to mine the additional tons of coal in 2021 as planned.