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Credit Suisse Initiates On Coal Stocks; Notes 'Cheap Options, But Dire Outlook'

Credit Suisse Initiates On Coal Stocks; Notes 'Cheap Options, But Dire Outlook'

In a report published Tuesday, Credit Suisse analyst Nathan Littlewood initiated coverage of Arch Coal Inc (NYSE: ACI), Alpha Natural Resources, Inc. (NYSE: ANR), Peabody Energy Corporation (NYSE: BTU) and Cloud Peak Energy Inc. (NYSE: CLD)

"Although the US' dependency on coal is reducing, there is no doubt that coal will remain a pillar of US electricity generation for a very long time," Littlewood wrote. "The sector has a LTM ND/EBITDA of 15.5x however, and we need to see either large-scale supply discipline (unlikely but possible) or bankruptcies and restructurings (more likely) in order to emerge from the other end of the tunnel."

Arch Coal: ‘Interesting' Portfolio, Poor Balance Sheet

Littlewood initiated coverage of Arch Coal with an Underperform rating and $0.50 price target.

Arch Coal has an "interesting "portfolio of longer term coal price options (including West Coast terminal) but also has "one of the worst" balance sheets. Littlewood noted that an options based valuation to the operational model and balance sheet reveals a negative ‘sum-of-the parts' valuation. In addition, the analyst sees the company's liquidity deteriorating over the next few years despite a "modest" cash burn.

Alpha Natural Resources: Liquidity Crisis Likely

Littlewood initiated coverage of Alpha Natural Resources with an Underperform rating and $0.50 price target.

Alpha Natural is the largest Met-Coal producer within Littlewood's coverage and is highly leveraged to the seaborne market. The analyst stated that that today's $82 per tonne spot seaborne met coal price is not sustainable even in light of the current deceleration of Chinese steel demand.

The analyst continued that like Arch Coal, Alpha Natural carries a "massive" debt burden and faces even more severe liquidity issues and could face a liquidity crisis when a portion of its revolver matures in mid-2016.

Peabody Energy: Waiting On New CEO

Littlewood initiated coverage of Peabody with a Neutral rating and $4.50 price target.

Peabody Energy is "unmatched" in terms of its size and scale, according to Littlewood who pointed out the company is the largest thermal coal producer in the US but its earnings leverage stems from its Australian met coal business.

Peabody Energy's balance sheet and liquidity positioning "is not as bad" as Arch Coal and Alpha Natural Resources. However, Littlewood suggested investors wait to learn more about the intentions of the company's new CEO.

Cloud Peak Energy: Best Capitalized Coal Company

Littlewood initiated coverage of Cloud Peak Energy with an Outperform rating and $11 price target.

Littlewood's only bullish recommendation stems from the fact that Cloud Peak Energy is the best capitalized of the US Coal names and the least likely to cause "sleepless nights."

The company's PRB focus implies it offers one of the "cleanest" product offerings, but its low heat content means that its relative appeal is reducing as scrubbing technology more wide spread. In addition, the analyst argued that the company will be a beneficiary of higher gas prices on a 12 month view.

Latest Ratings for ACI

Jan 2021Evercore ISI GroupDowngradesOutperformIn-Line
Jan 2021Wells FargoDowngradesOverweightEqual-Weight
Jan 2021Morgan StanleyDowngradesEqual-WeightUnderweight

View More Analyst Ratings for ACI
View the Latest Analyst Ratings


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