Coal Industry Stock Outlook - July 2015 - Industry Outlook

Coal Stocks Smarting from Lower Demand, Prices

In the U.S., coal is presently produced in more than 50% of the states. The top five coal-producing states -- Wyoming (39% of the total), West Virginia (12%), Kentucky (8%), Illinois (5%) and Pennsylvania (5%) -- contribute nearly 79% of the total coal production of the country, per reports from the U.S. Energy Information Administration EIA.

In keeping with the statistics, Wyoming houses two of the largest coal producing companies of the country: Peabody Energy Corp. BTU, operating the North Antelope Rochelle Mine, and Arch Coal ACI, running the Black Thunder Mine.

Unfortunately, all coal producers have been affected by the drastic fall in demand and consequently prices per ton of coal. This has taken a toll on their earnings performance. Peabody Energy and Arch Coal incurred losses in the last four quarters and were asked to furnish financial information to the Wyoming Department of Environmental Quality's Land Quality Division ("LQD") to verify whether they qualify for the self-bonding program in the state. Peabody was able to qualify for the self-bonding, while Arch Coal's fate is still under review.

Coal remains a dominant source of power generation worldwide despite the increasing use of other sources. However, natural gas and renewables are eating away coal's share at a rapid pace. The gradual decline in coal usage in power plants could be attributed to the implementation of the Mercury and Air Toxics Standards by the U.S. Environmental Protection Energy. This has already led to the retirement of a number of coal-fired power plants in the country.

Coal and its various byproducts also find use in the industrial sector, underlying its manifold advantages. However, unchecked usage of this fossil fuel has raised concerns in all quarters. The primary cause of concern related to coal is global warming caused by the emission of greenhouse gases.

Zacks Industry Rank: Negative Outlook

The Zacks Industry Rank, which relies on the same estimate revisions methodology that drives the Zacks Rank for stocks, currently puts the coal industry at 210 out of 258 industries in our expanded industry classification. This puts the industry in the lower third of all industries, corresponding to a negative outlook.

The way to look at the complete list of 258 industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #85 and lower) is positive, the middle one-third of the list (Zacks Industry Rank of #86 to #169) is neutral while the outlook for the bottom one-third (Zacks Industry Rank #170 and higher) is negative.

Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).

Of the 19 coal companies presently in our coverage, Rhino Resource Partners LP RNO, CONSOL Energy Inc. CNX and Cloud Peak Energy Inc. CLD, have a Zacks Rank #2 (Buy), 8 have a Zacks Rank #3 (Hold), and 8 are relegated to a Zacks Rank #4 (Sell).

Earnings Review and Outlook

The coal industry's overall earnings results in the first quarter of 2015 were on the softer side with nearly 60% of the companies in our coverage posting a negative earnings surprise.

Companies like Rhino Resource Partners, CONSOL Energy Inc. and Cloud Peak Energy Inc., however, came up with earnings beats in the first quarter. Disappointments came from the two big operators in the space -- Peabody Energy and Arch Coal -- with both missing earnings estimates. Peabody and Arch Coal are also expected to report in the red in the second quarter of 2015.

In response to lackluster coal market fundamentals, the companies have resorted to stringent measures to improve their financial performance. Miners have taken initiatives to cut costs while engaging in tactful expenditures to ensure coal-mining safety. High-cost coal mines are being shuttered while operations are moved to low-cost regions.

Miners have taken the extreme decision of selling some coal mines and cutting jobs to lower operating costs. Two Peabody executives have volunteered a temporary pay cut to lower the expenses on the company amid rising losses. Longwall coal mining techniques are also having a positive impact on production.

As things stand, the challenging market conditions are expected to prevail for the better part of 2015. While the majority of coal companies are curtailing capital expenditures, Arch Coal has taken a step further to discontinue the payment of dividends. Peabody too has lowered its payout to maintain cash and liquidity. A premier met coal producer Walter Energy Inc. WLT is currently finding it difficult to meet its debt obligation and is trying to remain solvent.

A bright spot for these coal operators is the rising demand for coal from India. Coal production in India falls far short of its domestic requirement as most of its power units are run on this fossil fuel. The country will thus have to rely on imports to sustain its growth plans. India needs to import both thermal and metallurgical coal providing ample room for these U.S. exporters to vie for.

For a detailed look at the earnings outlook for the different sectors in our coverage, please check our weekly Earnings Trends report.

Bottom Line

Unlike renewables like wind and solar that rely on nature's whims for the production of energy (the wind must blow and the sun needs to shine), coal-based power plants provide stability to the performance of the grid. Coal is also far cheaper than other fuel sources. And let's not forget that it was coal that brought about the Industrial Revolution and the modern day economy that we know today.

Admittedly, coal has a long list of drawbacks. Still, its cost advantage and wide availability in most countries across the world make it a widely accepted source of power generation.

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RHINO RESOURCES RNO: Free Stock Analysis Report
 
CONSOL ENERGY CNX: Free Stock Analysis Report
 
CLOUD PEAK EGY CLD: Free Stock Analysis Report
 
PEABODY ENERGY BTU: Free Stock Analysis Report
 
ARCH COAL INC ACI: Free Stock Analysis Report
 
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