Cowen Coal Preview: 'Make The Bad Man Stop'

A new report by Cowen & Co analyst Daniel Scott focuses on the battered coal industry. Despite the dreary outlook in the space, Scott explains that some coal stocks are better-positioned than others to weather the downturn.

In The News

The Supreme Court’s ruling against the Mercury and Air Toxic Standards (MATS) plan was a positive for the coal industry, but it provided little support to share prices. According to Cowen, pressure from natural gas has been heavily weighing on the coal industry. At current prices and current production rates, natural gas eclipsed coal for the first time ever in April in terms of generation.

In other news, the weakening financial environment has made self-bonding capacity even more critical for coal companies. Cloud Peak Energy Inc. CLD and Peabody Energy Corporation BTU both recently announced a renewal of self-bonding capacity in Wyoming, while Alpha Natural Resources, Inc. ANR reportedly lost its eligibility.

Q2 Estimates

Cowen is about 4 percent below consensus EBITDA estimates for coal stocks in this earnings season. Among the coal names, Cowen is farthest below Q2 consensus for Arch Coal Inc ACI (13 percent below consensus) and Alpha Natural (27 percent below consensus).

Outlook

For now, Scott believes it will be more of the same for coal stocks in coming months, with capital preservation the name of the game. The report names Outperform-rated Alliance Resource Partners, L.P. ARLP as Cowen’s top pick in the space.

Cowen also has Outperform ratings on Foresight Energy LP FELP and Arch Coal and Market Perform ratings on Natural Resource Partners LP NRP and Teck Resources Ltd (USA) TCK.