Seeking Alpha: Arch Coal Holding On For An Appalachian-Driven Rebound

U.S. coal stocks have been almost universally pasted, and it's not hard to see why. Many price indexes have carved out new lows, and EBITDA has shrunk to a point where many companies are in a tight squeeze with respect to interest and debt payments. Worse still, there are signs that several key markets may be changing (or have already changed) in ways that fundamentally alter the long-term outlook for U.S. coal producers.

Arch Coal (NYSE:ACI) is one of the companies that finds itself in a tricky spot. While the company should have adequate liquidity for several more years, that liquidity won't last indefinitely, and this is one of the companies potentially at risk from fundamental changes to the markets it has served for so many years. Arch Coal does offer impressive leverage to any near-term recovery in coal prices, akin to what investors have seen with some of the more leveraged and commoditized energy service companies lately, but this is by no means a safe play on a troubled sector.

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Arch Coal Holding On For An Appalachian-Driven Rebound

Seeking Alpha: Cost Reductions Alone Can't Save Alpha Natural Resources

Unlike Cloud Peak Energy (NYSE:CLD) and Peabody Energy (NYSE:BTU), I'm not certain that Alpha Natural Resources (NYSE:ANR) will have the staying power to exploit a recovery in the high-quality coal that it mines in Appalachia. As is the case with commodity stocks, there is a return/quality trade-off here that may seem counterintuitive - Alpha Natural doesn't appear to have staying power at today's coal prices, but a solid recovery in prices would have a much more profound impact on the stock price than for Cloud Peak or Peabody (and likely Arch Coal (NYSE:ACI) as well).

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Cost Reductions Alone Can't Save Alpha Natural Resources

Seeking Alpha: Peabody Energy Not In Serious Danger, But Still Needs Higher Prices

As I work my way through the coal companies that interest me, Peabody Energy (NYSE:BTU) is in a tricky spot. Relative to Alpha Natural Resources (NYSE:ANR) and Arch Coal (NYSE:ACI), I don't think there's really a long-term liquidity problem here, but then the company also needs to see a real recovery in metallurgical coal and I'm not sold on the company's position here.

Peabody's share price still seems to include a quality premium and I don't have a problem with that. The balance sheet isn't pristine, and the company slashed the dividend to preserve liquidity, but the company's well-placed in the U.S. Powder River Basin (or PRB) market and leveraged to growing coal imports in China and India.

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Peabody Energy Not In Serious Danger, But Still Needs Higher Prices

Seeking Alpha: Cloud Peak Energy Dug In For The Long Haul

Cloud Peak Energy (NYSE:CLD) has done better than most of its peer group over the past year, but does that really count for much when the shares are still down almost two-thirds? Making matters worse, pricing for thermal coal continues to be weak both in the U.S. and in the export markets, giving producers like Cloud Peak no place to hide.

Powder River Basin (or PRB) coal is barely competitive with natural gas at current prices and isn't competitive with Australian or Indonesian coal in Asian markets, but there is some hope that coal and gas prices could bottom this year. Cloud Peak also benefits from a low cost basis and a relatively comfortable liquidity position. The shares of coal companies are pretty speculative today, particularly as the industry is likely is long-term decline in the U.S., but Cloud Peak does still offer some worthwhile upside if/when coal prices do finally reach that bottom.

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Cloud Peak Energy Dug In For The Long Haul

Seeking Alpha: Cloud Peak Energy Still Generating Cash In A Tough Market

I had my doubts earlier this year as to whether the optimism over coal would last and it hasn't - the major pure-play producers are all looking at double-digit declines in their stocks. I did think that Cloud Peak Energy (NYSE:CLD) was better-positioned than most and the shares have performed relatively better - down about 12% versus a nearly 20% decline for Peabody Energy (NYSE:BTU), a 30% decline for Arch Coal (NYSE:ACI), and a nearly 50% decline for Alpha Natural Resources (NYSE:ANR).

Is this the right time to jump back into Cloud Peak? I continue to believe that Cloud Peak has the best long-term cost structure of the U.S.-based miners and that Powder River Basin coal (which is all that the company mines) will be the "last man standing" even if utilities turn even more toward gas and renewables for the long term. The upside here if thermal coal prices recover is pretty attractive, not to mention the long-term upside of Asian exports, but this is an idea where investors have to be willing and able to wait a while for the value opportunity to develop.

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Cloud Peak Energy Still Generating Cash In A Tough Market

Seeking Alpha: Peabody Energy Still Waiting For Better Days

Discussions of relative performance always need to anchored with the question of "relative to what?". Peabody Energy (NYSE:BTU) has been one of the best-performing U.S. coal companies year-to-date and over the last year (edged out in both cases by Cloud Peak (NYSE:CLD), and handily beaten by quasi-coal company CONSOL Energy (NYSE:CNX)), but the coal sector has continued to get thumped on weak met coal pricing, long-term concerns about EPA regulations for thermal coal, and rail shipments from the Powder River Basin.

I continue to believe that Peabody Energy is the best-positioned U.S. coal company for the long term. This year may see the company go FCF-negative, but Peabody can generate positive free cash flow at coal prices well below the breakeven levels for Alpha Natural (NYSE:ANR) or Arch Coal (NYSE:ACI). I also like the company's asset base (Illinois and Powder River Basin in the U.S., Australian met coal). While Alpha Natural has more upside if met coal prices suddenly shoot up again, I think Peabody is the better risk-adjusted pick overall.

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Peabody Energy Still Waiting For Better Days

Seeking Alpha: Alpha Natural Resources Can Most Likely Survive, But Can It Thrive?

In a brutal market for coal producers, Alpha Natural Resources (NYSE:ANR) management has done a commendable job of cutting costs and enhancing liquidity. Unfortunately, the $170 to $180 per tonne in met coal pricing that the company needs for positive free cash flow seems a long way off. Companies like Anglo American (OTCPK:AAUKY) have in the past struck lucky when key producing areas have been hit by significant disruptions and the significant short interest here is a bit like a coiled spring for any good news. That said, a 10x multiple to 2016 EBITDA discounted back doesn't offer huge upside and this is only a stock for those who can handle above-average risks and a long wait.

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Alpha Natural Resources Can Most Likely Survive, But Can It Thrive?

Seeking Alpha: Peabody Energy Looks For A Better Mix To Drive A Better Outcome

While it's U.S. peers like Arch Coal (ACI), James River Coal (JRCC), and Alpha Natural Resources (ANR) groan under the strain of less competitive Appalachian thermal and met coal assets, Peabody Energy (BTU) has neither. Peabody long ago got out of the Appalachian coal business and instead now offers relatively competitive thermal assets in the Powder River and Illinois Basins and met assets in Australian. Though these are far from fat times for Peabody, the company's asset mix, cost structure, and debt maturity schedule give it one of the stronger operating profiles today.

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Peabody Energy Looks For A Better Mix To Drive A Better Outcome

Seeking Alpha: Arch Coal Can't Catch A Break

Maybe the best thing that can be said about Arch Coal (ACI) recently is that the company's management has been able to execute a few transactions to give the company more breathing room. Pricing for Powder River Basin (or PRB) coal has been improving lately, but metallurgical coal pricing has continued to weaken, and Appalachian thermal coal just isn't competitive with natural gas today.

Some have called Arch Coal a long-dated call option on thermal and metallurgical coal price recoveries, and I suppose that is true to a point. It certainly has been the case in past cycles that improving prices benefit struggling operators more, so Arch Coal would likely offer more upside than Peabody Energy (BTU) or Cloud Peak Energy (CLD), were PRB prices to move into the high teens and/or met coal recovery above $160/ton.

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Arch Coal Can't Catch A Break

Seeking Alpha: Bukit Asam Offers Attractive Growth And Costs To Offset Weak Coal Prices

The coal story today is a global story, and Indonesia is no exception. While PT Tambang Batubara Bukit Asam (OTCPK:TBNGY) ("Bukit Asam") offers some of the best volume growth potential of any coal company and attractive cheaper-to-mine coal reserves, weak global coal prices have weighed heavily on the shares.

I believe this is a good time for risk-tolerant investors to consider a company like Bukit Asam. It will be difficult for countries like Indonesia, China, India, and Vietnam to reach their growth ambitions without expanding their electricity output and coal is likely to remain the backbone of those utility infrastructures for the time being. Moreover, Bukit Asam offers exception volume growth potential over the next few years and the prospect of lower transportation costs. Even if Bukit Asam's historical valuation multiples decline to a level more akin to global coal norms, these shares look more than 20% undervalued today.

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Bukit Asam Offers Attractive Growth And Costs To Offset Weak Coal Prices

Seeking Alpha: Cold Weather, Low Costs, And Higher Gas Helping Cloud Peak Energy

Powder River Basin coal specialist Cloud Peak Energy (CLD) is a fairly simple coal play. Unlike Peabody Coal (BTU), Alpha Natural (ANR), or Arch Coal (ACI) that rely to varying degrees on metallurgical coal, exports, and/or thermal coal mined in Appalachia, Cloud Peak is a US-focused play on the lower-sulfur coal mined in the PRB region. If natural gas prices remain above $3.50/mmBTU, Cloud Peak should be able to log solid margins and generate good cash flow and if the U.S. gets even more stringent with rules concerning sulfur emissions, it will only help Cloud Peak.

Cloud Peak's leverage to gas prices is not lost on the Street. As PRB coal prices have marched from around $8/ton at the start of the fall to around $12/ton, so too have the shares moved up around 20%. It remains to be seen if natural gas prices will prove sticky enough to maintain good PRB coal pricing (and/or whether companies like Arch Coal will expand production), but it looks like Cloud Peak is still priced to offer a better return than normal market averages if you believe that PRB coal prices can stay at $14/ton or higher for the long term.

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Cold Weather, Low Costs, And Higher Gas Helping Cloud Peak Energy

Investopedia: Peabody Energy Carries Higher Expectations, But Solid Value

Having recently examined Arch Coal (NYSE:ACI) and Cloud Peak Energy (NYSE:CLD), it's time to examine the largest U.S. coal producer – Peabody Energy (NYSE:BTU). There is a lot to like about Peabody at first glance, as this company has attractive U.S. thermal coal exposure (with minimal Appalachian reserves) and heavily China-leveraged met coal exposure.

On the other hand, Peabody is arguably the most well-respected coal miner out there (and maybe one of the best-regarded natural resource companies overall) and investors and analysts consistently award the stock a higher multiple than its peers. Consequently, while Peabody may the highest-quality coal stock to own today, the upside in these shares to a thermal (and/or met) coal recovery doesn't seem as great as in its rivals.

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Investopedia: Cloud Peak Energy May Have A Steeper Road To Recovery

Multiple sell-side analysts keep talking about the thermal coal recovery, but Wall Street seems to be responding with “that's okay, after you...”. On a six-month, year-to-date, and three-month basis, the shares of most of the major U.S. coal producers are in the red, with the met-coal miners like Peabody (NYSE:BTU), Arch Coal (NYSE:ACI), and Alpha Natural (NYSE:ANR) under-performing the thermal-focused Cloud Peak Energy (NYSE:CLD).

It's true that natural gas prices have risen of late, making coal more cost-competitive. It's also true that coal inventories have been worked down at utilities and that miners have been relatively responsible in idling marginal mines.

It's still not abundantly clear that Cloud Peak Energy offers a great opportunity today. While this is a very well-run miner with solid assets, the counter-intuitive reality is that it's offer the lesser operators that see the biggest stock price improvements early in a recovery. It's also not certain that this “recovery” has legs or will show up in the numbers anytime soon, as there is ample capacity, prices are still weak, and margins are very thin. While I think Cloud Peak is on balance a good play on an eventual thermal coal recovery, investors are going to need patience for this stock to work.

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Investopedia: Will Improving Thermal Coal Markets Boost Arch Coal?

Until very recently, it seemed like thermal coal producers couldn't buy a break. Utility inventories were well above historical averages, prices were barely sufficient to break even, and demand continued to decline (as seen in the traffic numbers for major railroads). That's taken the price of Arch Coal (NYSE:ACI), the country's second-largest coal producer) down more than 90% over the past five years. Now it seems like there are some signs of life in the thermal coal market, but will the recovery be strong enough to meaningfully improve the fundamentals for this struggling coal producer?

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Investopedia: Investors Want Nothing To Do With Cloud Peak Energy

Warm winter weather and low natural gas prices have gutted the coal market in the United States. Utilities like American Electric Power (NYSE:AEP) are switching over as much production to natural gas as they can, while railroads from Union Pacific (NYSE:UNP) to CSX (NYSE:CSX) are reporting sharp drops in coal carloads. That is leading coal producers like Peabody Energy (NYSE:BTU) and Cloud Peak Energy (NYSE:CLD) to cut production, and leading investors to fret about the near-term outlook for EBTIDA.

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Seeking Alpha: Arch Coal Has To Bottom Out Eventually

The most dangerous words in commodity investing are "it can't get any worse". Nevertheless, it's hard to investigate the current conditions and valuation at Arch Coal (ACI) and come away thinking that there isn't some long-term potential here in the shares. Potential is a dangerous word, though, and nobody should consider these shares today who can't stomach the thought of another leg down before stabilization.

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Arch Coal Has To Bottom Out Eventually

Investopedia: Cloud Peak Energy - The Power In Powder

Although 2011 was not an especially strong year for any industrial commodity, it was a pretty lousy year for coal. Export volume stayed pretty high, but momentum was sapped by weakness in met coal and a general cooling-off of what was probably far too much investor enthusiasm to start with. As is almost always the case, it wasn't different this time.

That being said, investors may yet want to bone up on Cloud Peak Energy (NYSE:CLD). As a pure play on the closest thing to clean coal, Cloud Peak could see stronger demand in both domestic and export markets, as well perhaps as interest from larger buyers. (For more, see Earning Forecasts: A Primer.)

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