Shift to Attractive from Neutral following underperformance on improved thermal outlook, upcoming group catalysts, 35% upside We raise our coverage view to Attractive from Neutral. (1) We now see attractive 35% average upside for the group after recent underperformance (-13% vs. S&P 500 since May 1) on China fiscal tightening and US/global growth concerns. (2) Our outlook for international and US bituminous thermal coal is improved vs. a more cautious previous stance. We expect recent increases in thermal exports and lower production levels to persist, leading to near-normal thermal coal inventories by year’s end and forcing domestic utilities to sign baseload contracts for 2012 at prices above mid-cycle. (3) We expect higher oil prices to support higher international coal prices and improved energy investor sentiment. (4) We expect stabilization and modest reacceleration of global GDP growth.
Raise thermal coal prices on higher oil prices, exports and producer discipline; now prefer stocks with bituminous thermal/met assets We see risk/reward for thermal coal prices as more favorable than met at present and thus now prefer exposure to stocks with bituminous thermal coal (international and domestic) as well as met coal assets. Recent checks give us increased confidence export capacity can support even greater thermal exports, while higher oil prices should support higher international thermal coal prices and the competitiveness of US exports. We now expect CAPP/NAPP prices to average $75per ton for 2012-2013, with upside risk from greater demand from China/India/Europe. While our view that met coal prices will remain above mid-cycle through 2013 is unchanged, we expect 2H2011 global steel data points to be seasonably weak and met coal prices to continue moderating as supply/demand loosens.
PCX to CL-Buy from Neutral; BTU to Buy from Neutral We raise PCX to CL-Buy from Neutral on underappreciated leverage to higher thermal coal prices, multi-year free cash flow (2011-2015 FCF = 57% of market cap) and attractive valuation. Following recent underperformance, we raise BTU to Buy from Neutral for its direct exposure to international thermal coal and leading organic growth platform. We lower WLT to Neutral from Buy; while we still like its international growth outlook, we see better upside for others following relative outperformance and now assume more modest multiple expansion. We raise CNX to Neutral from Sell due to improved EBITDA/upside and potential for upcoming Marcellus and Utica well results to be better than expected. We have updated our estimates and price targets.