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Coal Miners Going Bankrupt: Does the Road End Here? - Analyst Blog

Zacks Equity Research

One wonders what’s next in the coal industry after two primary metallurgical coal producers – Walter Energy, Inc. WLT and Alpha Natural Resources, Inc. ANR – have been delisted from the New York Stock Exchange due to “abnormally low” traded share prices. Walter Energy has even filed for bankruptcy protection.

Depressed due to various factors, the plight of coal stocks today is unimaginable just a few years back. Coal has traditionally been the dominant fossil fuel used for power production. Apart from electricity generation coal has been put to use in manufacturing plants and industries to make chemicals, cement, paper, ceramics and metal products, to name a few.

Unfortunately today, all U.S. coal producers have been severely hit by weak demand that have led prices to multi-year lows.

 Who's Next In Line to Go Bankrupt?

One of the leading producers and exporters of metallurgical coal in the U.S., Walter Energy, filed for bankruptcy protection on Jul 15, 2015, under Chapter 11 of the U.S. bankruptcy code. The filing excludes Walter Energy’s Canadian and United Kingdom operations. Sunk in the pit of tumbling coal prices, Walter Energy’s bankruptcy protection filing is an effort to restructure its finances.

Bristol, VA-based Alpha Natural Resources could also file for bankruptcy protection this August burdened by heavy debts. Media sources revealed that the company was negotiating a "debtor in possession" loan with its creditors.

Another thermal and met coal producer, Arch Coal ACI, is on thin ice. Since May 5, 2015, Arch Coal’s share price has been trading below the $1 mark. The company has been chalking out ways with its lawyers and bondholders to avoid insolvency.

Recently, the company announced a one-for-ten reverse stock split of its common stock. The reverse stock split is expected to take place after market close on Jul 27, 2015. This step has been taken in order to increase the price of Arch Coal shares and maintain its listing in the NYSE.

What Sealed Coal’s Fate

The death knell struck for the coal industry when the U.S. Environmental Protection Agency (“EPA”) finalized Mercury and Air Toxics Standards (“MATS”) in 2012 and proposed its Clean Power Plan in Jun 2014. The clean air initiatives aimed at reducing hazardous toxics from the air through the installation of pollution control equipment. The EPA estimates coal consumption in the power sector to decline by 7.4% in 2015 from 2013 levels.

The situation has only been made worse by tough competition from clean-burning natural gas. The superior fuel efficiency of combined-cycle natural gas facilities has made this technology even more popular among the utilities. Addition of renewable energy sources also had a negative impact on thermal coal demand.

The headwinds were not confined to thermal coal alone. Met coal, which is essentially used in the iron and steel industry, has also taken a beating .Not so long ago, the Asian market, particularly China, saw a huge demand surge for met coal on peaking industrialization.

Rising exports and mounting demand in the east led to a major consolidation in the U.S. met coal industry. Companies like Walter Energy and Alpha Natural Resources snapped up smaller entities to scale up their operations which increased their debt levels.

However, competition intensified with the emergence of the Australian and Indonesian players. Seaborne coal exporters from these regions enjoy a locational advantage because of their proximity to the prime steel-hungry Asian markets. Their lower transportation cost had a definite edge over the U.S. players.

A stronger U.S. dollar vis-à-vis the Australian currency was a further handicap for the U.S. met coal industry.

Free-Fall in Current Prices

The weak coal industry landscape has affected a number of big producers like Arch Coal, Peabody Energy Corp. BTU, Cloud Peak Energy Inc. CLD and Rhino Resource Partners LP RNO. The chart below outlines the fall in their share prices:
 

Company

Price on July 20, 2015

% Drop Since Jan 2014

% Drop Year to date

Arch Coal

$0.22

95.3%

87.6%

Peabody Energy

$1.13

94.2%

85.4%

Cloud Peak

$3.41

81.1%

62.9%

Rhino Resource

$1.20

89.7%

46.7%


The weakness in coal demand and softness in selling prices have taken a toll on their performances. The top producers have been reporting in the red for the past few quarters.

Is There a Way Out?

The U.S. Energy Information Administration in a recent report has projected a 75 million short ton (MMst) decline in coal production in 2015. Given the dismal conditions, simply lowering operating costs by idling mines, cutting down on work force and selling mines won’t work for the coal miners.

We believe the call of the hour is to diversify their revenue generation sources. For example, CONSOL Energy Inc. CNX, sensing the weak coal market conditions, has shed a chunk of its coal assets over the past two years to create a natural gas portfolio. Natural Resource Partners LP NRP also diversified its revenue stream by adding oil and gas properties at the right time.

Master limited partnerships (MLPs) have also been used to counter the coal downturn. It is a type of publicly traded investment instrument that combines tax benefits of a limited partnership with the liquidity of a publicly traded company. CONSOL Energy split its thermal coal segment and related mining operations to form CNX Coal Resources LP.

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