A Union Pacific train delivers coal in the Powder River Basin, one of the more distressed coal mining regions in the U.S. lately as major producers in the region have been forced to file for bankruptcy reorganizations.
While many of the top publicly traded U.S. coal companies are still reporting fairly strong results, a recent decline in what had been a vibrant export market alongside a new wave of bankruptcies in the industry is creating some tension for a sector that may soon find itself turning back to a smaller domestic coal market.
Some U.S. coal producers are increasing their focus on shareholder value initiatives such as stock buybacks and dividends instead of investing in significant growth projects. While there has been quite a bit of stress on the sector lately, several coal company executives, on second-quarter earnings calls, expressed confidence in their companies' plans to address changing coal markets.
S&P Global Market Intelligence listened to a wide range of coal earnings calls for the second quarter and compiled some of the comments made on those calls. The standout quotes are in italics below.
Changing things up
"You really don't know who's wearing a bathing suit until the tide goes out," Ramaco Resources Inc. Executive Chairman Randall Atkins said on the company's earnings call. "This summer, we have seen a riptide with some unusual and severe stress in the coal space."
Several coal companies filed for bankruptcy in 2019, resulting in plenty of assets being made available to purchase, even if interest has been somewhat muted. The industry also recently saw two of its largest producers, Peabody Energy Corp. and Arch Coal Inc., form a joint venture for their Powder River Basin and Colorado assets.
"I would say that I've been in this business a long time, and there's probably more strategic discussions going on in the industry today than I've seen in my career," Alliance Resource Partners LP President and CEO Joe Craft said. "We've got teams looking at that and evaluating that. It's hard to predict if anything will come of that, but there's a lot of options on the table right now."
Some of those assets have proven to be less than desirable to many producers, who instead see an opportunity for those with better assets to capture more market share from their competitors.
"So on the other side of the ledger, you're seeing quite a few bankruptcies with various players," Hallador Energy Co. President and CEO Brent Bilsland said. "And in some cases, they've struggled to raise debt financing and they've struggled to find buyers for some of those assets. And that's because you're seeing a handful of assets out there that can't generate positive cash flow with zero debt."
Contura Energy Inc., which divested its Powder River Basin assets in 2017, recently was named the winning bidder in a bankruptcy auction of those assets. The company had pivoted to eastern metallurgical coal assets and intended to consider a sale of the properties if it ultimately secures the assets, pending negotiations with the federal government.
"I believe, strategically, we got out of the [Powder River Basin] for a reason. I don't know that we're terribly interested in doing anything long term," Contura CFO Andy Eidson said.
Mixed results on export markets
Several companies reported that there has been a weakness in export prices for the past few weeks and are suggesting they will turn to compete in domestic coal markets if needed. At the same time, Illinois Basin producers have struggled to move coal out of the region due to flooding of the Mississippi River.
On the other hand, companies such as Arch Coal said they are looking at the bigger picture for coal exports.
"We think that markets are overall pretty well-balanced. Yes, we've seen some weakness over the last couple of weeks," Arch Coal CEO John Eaves said. "We continue to look long term. We feel very confident that with our cost structure, our quality and our balance sheet, [we are] able to manage through these dips and really capitalize when they move up."
Coal companies also continue to contribute to a growing trend of buying back their own stock or issuing dividends in light of limited appetite for growth or risks that do not fit strict investment filters. While Consol Energy Inc. is pursuing an organic growth project on its metallurgical coal property in West Virginia, it is focusing a lot of capital on a share repurchase program that is expected to be more aggressive in the second half of the year.
"We believe as well as the board that [the company's share price is] way undervalued," Consol President and CEO Jimmy Brock said. "So it would be hard to find a return on capital is probably going to be higher than share repurchase now."
Peabody Energy CFO Amy Schwetz expressed a similar sentiment on the company's earnings call. Peabody, which trades as BTU on the New York Stock Exchange, has already repurchased a quarter of its own outstanding shares since announcing a buyback plan in summer 2017.
"In terms of investments, whether that'd be investment in our current portfolio of assets or M&A, our investment filters remain the centerpiece of all activity," Schwetz said. "The hurdles for investment are considerable but not impossible, as demonstrated by transactions over the past year. Our dollars also continue to be spent on the investment in the company that we believe represents the best value, BTU."