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Recent bankruptcies belie healthier credit metrics of other US coal producers

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Recent bankruptcies belie healthier credit metrics of other US coal producers

An ongoing structural decline in domestic demand and a new round of bankruptcy reorganizations in the U.S. coal sector overshadows the fact that many of the top publicly traded U.S. coal companies score relatively well against their peers in terms of operational, solvency and liquidity credit metrics.

Much of the coal sector reorganized in bankruptcy restructurings several years ago, and companies now have much cleaner balance sheets. While ranking fairly well against unique groups of peers including international mining companies, even some of the highest-rated U.S. coal companies are considered to be somewhat speculative and subject to risk, according to S&P Global Ratings and Moody's Investors Service ratings.

"Essentially, the new world is one where you have the largest companies that restructured and they all came out with very strong balance sheets and very, very conservative metrics," said Chiza Vitta, director of S&P Global Ratings' natural resources group. "Over the past three or four years, those companies restructured, namely Arch Coal Inc. and Peabody Energy Corp., and slowly demonstrated they could hang on to their strong metrics and they migrated all the way to the low BB [credit rating] area."

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As of July 29, U.S. coal companies scoring highest on an S&P Capital IQ credit assessment include Arch and Peabody, which already went through early bankruptcy court restructurings. Reorganized coal companies report they are generally directing capital toward shareholder value initiatives such as stock buybacks and dividends rather than large growth projects. Others with top credit assessment scores include companies focused on producing metallurgical coal for steelmaking such as the relatively new Ramaco Resources Inc. or Warrior Met Coal Inc.

Benjamin Nelson, a senior credit officer and lead coal analyst with Moody's Investors Service, said it would take a significant improvement in competitive position or a significant debt reduction to move ratings upward in the coal sector.

"In a normal or growing industry, if your competitive position improves and your debt starts to go down, that can drive an upgrade pretty quickly," Nelson said. "In an industry experiencing a secular decline, you need to do those things to maintain your rating."

Alliance Resource Partners LP stands out as one of the few companies that avoided bankruptcy while still maintaining a somewhat solid credit rating compared to its U.S. coal mining peers. Alliance is one of the older and more conservative coal companies, Vitta pointed out. It also recently announced a pivot to selling more coal into export markets and diversifying into oil and gas mineral interests.

While some of the coal companies that did not resort to bankruptcy restructuring several years ago are now in the middle of their own reorganizations, the entities that reorganized earlier tell investors they plan to be conservative with cash and cautious about growth projects. However, certain companies have engaged in some growth activity in recent months. For example, Peabody acquired a new metallurgical mine in Alabama in late 2018, while Arch and Consol Energy Inc. announced recent organic growth projects in the metallurgical coal space.

"I think to some extent that is an admission that the thermal side is going to be embattled and they don't see that as something that can survive," Vitta said.

The nation's largest thermal coal region, the Powder River Basin, has seen two major producers file for bankruptcy reorganization in recent months. Pure-play regional producer Cloud Peak Energy Inc. and Blackjewel LLC, which bought Powder River Basin assets relatively recently in another company's bankruptcy reorganization, are both in different stages of bankruptcy sales of their assets.

"There was this narrative that Powder River Basin coal ... because it was really cheap to get to and close to the surface, it was most ideal to compete with natural gas," Vitta said. "But that's completely flipped."

Foresight Energy LP scores near the bottom of a credit analysis against its peers. The Illinois Basin coal producer is struggling with weaker export prospects and logistical challenges. Vitta said the company's credit rating is also dragged down due to being considered as a group with Murray Energy Corp., which acquired significant debt making substantial acquisitions in recent years, including a large stake in Foresight.

The credit health panel is an S&P Global Market Intelligence tool that evaluates the creditworthiness of a chosen company relative to a unique group of industry peers. The methodology for determining a relative credit health score is available here.

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