For Immediate Release
Chicago, IL – July 29, 2013 – Today, Zacks Equity Research discusses the U.S. Coal, including Alliance Resource Partners LP (ARLP-Free Report), Natural Resource Partners L.P. (NRP-Free Report), Walter Energy Inc. (WLT-Free Report), Peabody Energy Corp. (BTU-Free Report) and James River Coal (JRCC-Free Report).
Metallurgical coal or coking coal is used in steel production. Coal remains a dominant source of power generation worldwide. In the U.S., around 40% of total power generation capacity is coal fired.
The U.S., Russia, Australia, China, India and South Africa have the largest coal reserves in the world. Coal is produced in 25 states in the U.S. though the bulk of current production takes place in just five states: Wyoming, West Virginia, Kentucky, Pennsylvania and Montana.
According to estimates by the Energy Information Administration (EIA), the country’s current coal reserves will last for 168 years at the current production rate. They will most likely last even longer with environmental issues coming in the way. However, if the fuel’s environmental standing can be improved, there could potentially be new sources of end-market demand in the future, in communications and transportation systems, computer networks and even space expeditions.
As per the World Coal Association (:WCA), proven global coal reserves will last nearly 112 years at current production rates. On the other hand, proven oil and gas reserves are projected to last around 46 years and 54 years, respectively, at current production levels. Asia is the biggest coal market and presently accounts for 67% of the global coal consumption.
President Obama’s Climate Plan, which aims to lower carbon pollution in America, could impact the future prospects of the coal companies. Power plants in the U.S. are responsible for nearly 40% of greenhouse gas emissions in the country, and the majority of these units use coal as its fuel.
The president’s plan calls for implementation of carbon pollution standards for both existing and upcoming coal-fired units, which in a way could make coal-fired units more expensive and less attractive for operators. The electricity generators to avoid the stringent regulation could decide to erect power plants using natural gas or alternate sources, which will lower the demand for coal and impact the future profitability of the U.S. coal companies.
The European Investment Bank (:EIB), said it would stop financing majority of coal-fired power stations to help the European Union’s 28-nation coalition reduce environmental pollution. This decision is in sync with President Obama’s plan to cut down global emission. New coal units will not be funded unless the emission level is less than 550 grams of carbon dioxide per kilowatt-hour (gCO2/kW).
Zacks Rank – Negative Outlook
The Zacks Industry Rank, which relies on the same estimate revisions methodology that drives the Zacks Rank for stocks, currently puts the Coal industry at 232 out of 259 industries in our expanded industry classification. This puts the industry in the bottom third of all industries, corresponding to a negative outlook.
The way to look at the complete list of 259+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #85 and lower) is positive, the middle one-third of the list (Zacks Industry Rank of #86 to #169) is neutral while the outlook for the bottom one-third (Zacks Industry Rank #170 and higher) is negative.
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Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).
None of the 18 companies in the Coal industry has a Zacks Rank #1 (Strong Buy); only two have Zacks Rank #2 (Buy), while 7 have either Zacks Rank #5 (Strong Sell) or Zacks Rank #4 (Sell). The other 9 have Zacks Rank #3 (Hold). Overall, the Zacks Rank for the industry and for individual stocks indicate our bearish outlook.
Earnings Review and Negative Outlook
The companies haven’t reported Q2 results yet, but in terms of Q1 earnings surprises, Alliance Resource Partners LP (ARLP-Free Report), Natural Resource Partners L.P. (NRP-Free Report), Walter Energy Inc. (WLT-Free Report), Peabody Energy Corp. (BTU-Free Report) and James River Coal (JRCC-Free Report) came out ahead of expectations. In total, 54% of the coal companies in our coverage came out with positive earnings surprises in the first quarter, below the 65% average for the S&P 500 as a whole.
Second quarter earnings are on its way with the majority of the coal companies expected to report earnings within the next fortnight. The beginning of coal industry releases was quite bright with Peabody Energy surging ahead of market expectations in its second quarter.
Can the other operators in the coal industry match the performance of Peabody? We expect second quarter 2103 performance of most coal stocks in our coverage universe to decline from the year-ago quarter.
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