3 Stocks to Watch From the Coal Industry Despite Ongoing Headwinds
Zacks Coal industry stocks, after a rebound in 2022, are again suffering due to a decline in the usage of coal in thermal power plants in the United States. In 2023, the demand for coal will be adversely impacted by the planned retirement of coal units and the utilization of more renewable sources for electricity generation. The ongoing energy transition, with utility operators steadily phasing out coal units, will adversely impact the coal industry. Then again, the ongoing conflict between Russia and Ukraine is creating fresh demand from coal-importing countries. Hence, coal export from the United States is expected to improve in 2023 from the year-ago level.
Despite a drop in coal production, improving cost export volumes and stable coal production assets are likely to boost prospects of coal stocks like Peabody Energy BTU. Other coal stocks and CONSOL Energy CEIX and SunCoke Energy SXCwith high-quality production volumes are expected to gain during this difficult phase of the coal industry.
About the Industry
The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined through the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity and manufacture steel and cement. Per the U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which, about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many more years. Five states in the United States contribute nearly 70% of the yearly production and 60% of the coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal industry
3 Trends Likely to Impact the Coal Industry
U.S. Coal Production Drops: Per EIA’s projection, coal production in the United States is expected to drop in 2023 and 2024 after showcasing an improvement in the previous two years. EIA projects U.S. coal production to decline 2% year over year to about 583 million short tons (MMst) in 2023 and register a much steeper decline of 20% to 464 MMst in 2024 due to the expected reduction in coal usage in electricity production. This would hurt coal operators as they fight a tough battle against other sources of energy.
Despite Reliability, Emission Policy to Hurt Coal Industry: The improvement in demand for coal is short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly lower the demand for coal from the U.S. electricity space. Per EIA, coal-fired electricity generation would drop from 20% in 2022 to 16% in 2023 and drop further to 15% in 2024. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will fall drastically. Coal industry operators should brace themselves for challenges as several electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage. Despite the emission, coal stocks are still relevant as the commodity is a reliable source of energy and ensures 24x7 electricity production from the generation units.
Coal to Benefit From Rising Exports: Despite an expected drop in coal production volumes, coal operators in the United States can benefit from the expected rise in coal export volumes. Coal demand is expected to improve due to its economical pricing compared with other energy sources. Coal is still a viable energy option for many crucial industries across the globe. Per EIA, coal export volume may increase by 14.4% in 2023 to 98.4 MMst and by 6.7% more to 105 MMst in 2024. The World Steel Association forecasts a rebound in global steel volume production, rising 2.3% in 2023 to touch 1,822.3 Mt and up 1.7% in 2024 to touch 1,854 Mt. Steel production requires a lot of high-quality coal and nearly 70% of global steel production depends on coal. With the continued recovery in steel production, coal exports are expected to pick up and improve in the long run.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Coal industry is a 7-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #222, which places it in the bottom 12% out of 252 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since Jan 31, 2023, the industry’s earnings estimates for 2023 have gone down by 27.8%.
Before we present a few coal stocks that you may want to keep track of, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms S&P 500 & Sector
The Zacks Coal industry has underperformed the Zacks S&P 500 composite and the Zacks Oil and Gas sector over the past six months.
The stocks in the coal industry have gained 9.7% compared with the Zacks Oil-Energy sector’s growth of 14.9%. The Zacks S&P 500 composite has rallied 13.2% in the same time frame.
Six-Months Price Performance
Coal Industry's Current Valuation
Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
The industry is currently trading at a trailing 12-month EV/EBITDA of 2.92X compared with the Zacks S&P 500 composite’s 13.29X and the sector’s 3.54X.
In the past five years, the industry has traded as high as 7.6X, as low as 2.01X and at the median of 4.75X.
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector
3 Coal Industry Stocks to Keep a Close Watch On
SunCoke Energy: Lisle, IL-based SunCoke Energy is a raw material processing and handling company serving steel and power customers, with principal businesses in coke making and logistics. With an annual 5.9 million tons of coke-making capacity, it is poised to benefit from rising met coal exports and increasing demand for met coal from the steel industry. The company plans to invest $95 million in 2023 to expand its operations. The Zacks Consensus Estimate for 2023 earnings has moved up by 1.3% in the past 60 days. The current dividend yield of the company is 4.12%. The stock has gained 9.7% in the past three months compared with the industry’s rally of 21.6%.
SunCoke Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SXC
Peabody Energy: St Louis, MO-based Peabody Energy engages in the coal mining business and has thermal and metallurgical operations. In 2022, nearly 28% of the company’s revenues were derived from five customers with whom it still has 16 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2023 to 2025. This assures a steady flow of revenues. The Zacks Consensus Estimate for Peabody Energy’s third-quarter and fourth-quarter 2023 earnings has moved up by 8.8% and 9.9%, respectively, over the past 60 days. The stock has gained 16.8% over the past three months. Peabody Energy currently has a Zacks Rank #3 (Hold).
Price and Consensus: BTU
CONSOL Energy: Canonsburg, PA-based CONSOL Energy, having a Zacks Rank of 3, produces and exports bituminous thermal coal. The company owns and operates the Pennsylvania Mining Complex and the Baltimore Marine Terminal, and controls more than 1 billion tons of undeveloped reserves. The company is consistently operating multiple longwalls to meet increasing demand.
The Zacks Consensus Estimate for 2023 earnings and revenues suggests a year-over-year rise of 57.8% and 19.3%, respectively. The stock has gained 49.6% over the past three months.
Price and Consensus: CEIX
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Peabody Energy Corporation (BTU) : Free Stock Analysis Report
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