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Coal sector survivors to look back at quarter of further supply rationalization

With U.S. coal production pushing record lows, there are increasingly scantglimmers of hope for coal investors as second-quarter earnings reports loom.

In the coal space, the second-quarter earnings season will primarilyoffer investors in smaller coal companies a glimpse at what they are doing tosurvive the depressed market. The larger coal producers in the U.S. —Peabody Energy Corp.,Arch Coal Inc. andAlpha Natural ResourcesInc. — have all filed for bankruptcy court protection amidprolonged weakness incoal pricing and broader fuel demand.

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While pockets of the coal sector have experienced the marketrout differently, the SNL Coal Index has lagged the broader SNL Energy Index,which itself has underperformed the S&P 500. The situation in the coalsector has led many analysts and financial research companies to coverage of some ofthe largest companies, or even the entire coal sector, in recent months.

Coal production in 2016 has been on pace for a record-lowlevels. As of July 12, the U.S. Energy Information Administration hadbumped up itsprediction for coal consumption through 2017, but still predicts less than 700million tons will be burned annually. That is down from consumption as high as917.7 million tons as recently as 2014, according to the EIA's recent annualcoal report.

CONSOL Energy is the largest major U.S. coal company bymarket capitalization, with a value of about $3.89 billion. However, the companyhas been increasingly shedding or compartmentalizing its coal assets whileexpanding its natural gas business.

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S&P Capital IQ rates CONSOL a "strong buy,"but this is largely banking on the company's natural gas division performance.

"The more established Marcellus Shale offers some ofthe best returns from natural gas plays in the U.S., based on data fromBentek," a July 23 report from S&P Capital Markets states. "Wethink the prospect of liquefied natural gas exports on the horizon, exportpipelines to Mexico and a growing petrochemical industry will increase demandfor natural gas over the medium term. We also think new infrastructure willshrink the price-basis differential."

A recent analysis of U.S. Mine Safety and HealthAdministration data showed CONSOL Energy's second-quarter coal productionincreased by 10.7% since the prior-quarter. CONSOL is scheduled to report itsearnings with investors July 26. CONSOL's master limited partnership,CNX Coal ResourcesLP, is scheduled to report earnings after the market closes July 25.

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WestmorelandCoal Co., a company built around minemouth coal operations and acost pass-through business model, is expected to report its earnings Aug. 2. AnSNL Energy analysis shows that the company is about to report on a quarter inwhich its own coal production has fallenalmost 40% quarter to quarter.

S&P Capital IQ most recently recommended a"hold" on Westmoreland. The recommendation is based on negativestreet sentiment, price momentum and valuation as well as neutral quality andfinancial health assessments and a positive growth rating.

A large part of Westmoreland's challenge, the company'sS&P Capital IQ report notes, is the broader troubles faced by the entirecoal sector.

"Production remained just below 1 billion short tons in2014 and fell to 900 million short tons in 2015, the lowest level since1986," the report states. "Despite the supply response however, ithas still not been enough to balance the market, as coal continues to losemarket share to natural gas for use as feed-stock by power producers."

ForesightEnergy LP and Alliance Resource Partners LP also have "buy"ratings from S&P Capital IQ. An SNL Energy analysis production at Foresight went upslightly from both the prior quarter and the year-ago quarter. Foresightrecently disclosedthat it had entered an agreement supporting a global debt restructuring.

NaturalResource Partners LP has a "hold" rating.

Bentek, SNL Energy andS&P Capital IQ are owned by S&P Global Inc.