The Zacks Analyst Blog Highlights Alpha Metallurgical Resources, CONSOL Energy and PDC Energy
For Immediate Release
Chicago, IL – March 22, 2022 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Alpha Metallurgical Resources Inc. AMR, CONSOL Energy CEIX and PDC Energy, Inc. PDCE.
Here are highlights from Monday’s Analyst Blog:
Energy: The Place to Be Right Now
The increase in the borrowing cost of capital increases overall costs for a company. And these costs are already in increasing mode because inflation and supply chain issues have made operations more expensive. So there will be every endeavor to transfer these extra costs to the consumer.
The idea is that people will see the higher returns on saving their cash as opposed to the higher cost of anything they wish to buy and go for the obvious choice.
So demand will come down, there will be a reduction in the money in circulation, which will bring down inflation.
But rate hikes are usually paced out so the economy doesn't get shocked into a recession. And as inflation comes down, everything becomes that much more affordable for consumers.
In the meantime, not every market is affected equally. And certainly not one where demand far outpaces supply with the geopolitical situation further exacerbating the impact. So even as the Fed turns hawkish, oil continues to climb. And because of its scarcity and possibility of partial substitution with other fuels, energy prices in general rise with it.
That's mainly what makes energy stocks so attractive right now. But each stock is different and worth taking a closer look at. That's what I've done here-
Alpha Metallurgical Resources Inc.
Alpha Metallurgical Resources is a coal mining company with operations principally in Virginia and West Virginia. It primarily produces metallurgical coal to steel and coke producers although a small amount is also sold to domestic power generation companies. Its produced, processed and purchased coal is sold to customers in the U.S. and international markets, primarily India, China and Brazil.
Through its 65% ownership in the coal export terminal Dominion Terminal Associates ("DTA"), it is able to fulfill customer requirements with respect to coal blending, storage and transportation.
As of Dec 31, 2021, Alpha Metallurgical Resources operated twenty active mines across the Central Appalachia ("CAPP") coal basin as well as eight coal preparation and load-out facilities.
The company has recovered strongly from the pandemic, along with recovery in its key markets and with increased focus on the met coal segment.
China's standoff with Australia has been good because it resulted in China banning Australian coal, which of course opened the market up for companies like Alpha.
The energy crunch that resulted from inadequate crude reserves, inadequate alternative energy in Europe and the onset of winter had utilities leaning on coal, which added to the already strong demand from reopening economies and therefore ratcheted up prices for coal companies. While some costs are tied to prices, higher prices have been positive overall for profits.
The geopolitical tension in Ukraine is pulling Russian supply from the market, leading to increased scarcity in energy markets and sky-high prices. This is of course positive for coal producing companies and accounts for the strong position of this industry in the Zacks universe. The Zacks-classified Mining – Miscellaneous industry is therefore in the top 35% of Zacks-classified industries.
A significant point to note with respect to Alpha is how the company's debt-cap ratio has been coming down in the last few quarters. This is because of management's focus on using the favorable conditions to pay down debt. Which can only be viewed positively.
The lone analyst providing estimates on Alpha Metallurgical Resources appears to agree that this is an attractive environment for the company. So I'm seeing that the 2022 estimate has gone from $48.61 to $69.97 (up 43.9%) in just 30 days. The 2023 estimate has gone from $11.11 to $30.64 (175.8%).
Alpha Metallurgical Resources also has a Zacks Rank #1 and value-growth-momentum (VGM) Score A, which are indicative of strong potential.
The shares are priced at 0.65X sales, which is somewhere in between the high value and the median value over the past year but at a significant discount to the industry's 1.17X and the S&P 500's 4.38X. In other words, they are not expensive at all.
CONSOL Energy owns and operates productive longwall mining operations primarily in the Northern Appalachian Basin. It is a low-cost producer of high-quality bituminous coal that is sold for metallurgical, industrial and power generation (a large chunk of this is sold in Eastern U.S.) purposes, both in the U.S. and internationally.
The company is dependent on the railroads for delivery, so COVID related supply chain issues remain a constraint on growth. However, improving efficiency and increasing production in 2021 have helped CONSOL lower total cost per ton sold in 2021.
Additionally, CONSOL is benefiting from increased demand for coal for industrial and power generation both in the U.S. and abroad, which is leading to robust pricing.
A combination of these two factors is leading to improved profitability. Management has said that there is currently strong forward pricing and tight supply. So the environment is likely to remain positive.
CONSOL Energy is making the most of the situation by entering into long-term contractors with several customers. As a result, it is fully contracted for 2022 and partially for 2023. It is adding capacity to further boost output and revenue.
The debt level had increased considerably in 2017 but management has been bringing it down ever since. The debt cap is currently at under 50%, which is reasonable considering the nature of business.
Given all of the above, it is not surprising that CONSOL shares carry a Zacks Rank #1 and VGM Score A. Nor should it be surprising that the Coal industry, to which it belongs is in the top 3% of Zacks-classified industries.
And the lone analyst providing estimates seems to agree with the potential So estimates for this company are simply soaring. For 2022 earnings, the estimate has moved up 45% to $11.73. For 2023, it's up 421.4% to $11.47.
Its P/S multiple indicates a reasonable valuation, which indicates possible upside. On a P/E basis however, it is trading close to its low point over the past year (and the shares have traded in a pretty wide range, as has the industry).
PDC Energy, Inc.
PDC Energy is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. The firm is focused on the Wattenberg Field in Colorado and the Delaware Basin in Texas. The company, which reached its present form following the January 2020 combination with SRC Energy, is currently the second-largest producer in the Denver-Julesburg ('DJ') Basin behind Occidental Petroleum.
The Wattenberg Field is PDC Energy's core operating region although it also controls significant operations in the Delaware Basin. Around 86% of its total production in the December quarter came from the Wattenberg Field with the rest coming from the Delaware Basin.
PDC Energy grew its revenues by about 39% last year. The company — focused on growth through a combination of acquisitions and active drilling — spent around $583.1 million on oil and gas capital expenditures in 2021. It has a small amount of debt.
Its current expectation of generating approximately $2.7 billion in cumulative free cash flow (at a WTI price of $75, natural gas at $4 and NGL at $27.50) this year and next could prove to be conservative if energy inventory remains low and prices overheated for any length of time.
The company also pays a dividend.
PDC Energy shares carry a Zacks Rank #1 and VGM Score A. The Oil and Gas - Exploration and Production - United States industry, to which it belongs is in the top 22% of Zacks-classified industries.
The Zacks Consensus Estimates for 2022 and 2023 earnings are up significantly in the last 30 days. The 2022 estimate is up 29.8% to $13.41. the 2023 estimate is up 38% to $14.10.
The shares are also trading cheap with respect to both the industry and the S&P 500. They are also cheap compared to the historical period.
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