Zacks Industry Outlook Highlights Arch Resources, Warrior Met Coal and Ramco Resources
For Immediate Release
Chicago, IL – December 12, 2023 – Today, Zacks Equity Research discusses Arch Resources ARCH, Warrior Met Coal, Inc. HCC and Ramco Resources Inc. METC.
Industry: Coal
Link: https://www.zacks.com/commentary/2196000/3-coal-stocks-to-watch-from-the-challenging-industry
The Zacks Coal industry stocks, are suffering due to a decline in the use 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 continuing conflict between Russia and Ukraine is creating fresh demand from European 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 Arch Resources. Other coal stocks like Warrior Met Coal, Inc. and Ramco Resources Inc. with high-quality production volumes are expected to gain during this difficult phase.
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. EIA projects U.S. coal production to decline 1.5% year over year to about 585 million short tons (MMst) in 2023 and register a much steeper decline of nearly 18% to 480 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 cleaner 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 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 Industry's Silverling Is 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. European countries banned the import of coal from Russia due to the conflict in Ukraine is also creating new opportunities for U.S. coal exports. Per EIA, coal export volume may increase by 13% in 2023 to 97 MMst due to an increase in both thermal and metallurgical coal export volumes.
The World Steel Association forecasts a rebound in global steel volume production, rising 1.8% in 2023 to touch 1,814.5 Mt and 1.9% in 2024 to touch 1,849.1 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 nine-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 21% out of 251 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 24.3%.
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 But Beats Sector
The Zacks Coal industry has underperformed the Zacks S&P 500 composite but beat the Zacks Oil and Gas sector over the last one year.
The stocks in the coal industry have gained 2.8% against the Zacks Oil-Energy sector's decline of 2.9%. The Zacks S&P 500 composite has rallied 16% in the same time frame.
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 3.4X compared with the Zacks S&P 500 composite's 13.33X and the sector's 3.58X.
In the past five years, the industry has traded as high as 7.6X, as low as 2.01X and at the median of 4.7X.
3 Coal Industry Stocks to Keep a Close Watch On
Ramaco Resources, Inc.: Lexington, KY-based Ramaco Resources is the developer of high-quality, low-cost metallurgical coal and is poised to benefit from improving metallurgical coal demand. To meet the rising demand for met coal, the company intends to increase production from the expected range of 3.9- 4.4 million tons to 6.5 million tons in the medium term.
The Zacks Consensus Estimate for Ramaco Resources' 2023 and 2024 earnings has moved up by 18.9% and 24.4%, respectively, in the last 60 days. The current dividend yield of the company is 2.98% compared with the industry yield of 0.55%. The stock has gained 89.4% in the past year compared with its industry's rally of 2.8%.
Ramaco Resources sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here
Arch Resources Inc.: St. Louis, MO-based Arch Resources currently has a Zacks Rank #3 (Hold). The company produces and sells metallurgical and thermal coal. The company commenced longwall production at the Leer South mine, which will add high-quality 3 million tons of metallurgical coal annually to its total production.
The ongoing rebound in production in the steel industry will create fresh demand for met coal supplied by the company. The current dividend yield is 0.61%. The stock has gained 13.1% in the past year. The Zacks Consensus Estimate for its 2023 and 2024 earnings has moved up by 19.8% and 7.5%, respectively, in the last 60 days.
Warrior Met Coal, Inc.: Brookwood, AL-based Warrior Met produces and exports metallurgical coal for the steel industry. The company will benefit from the end of the labor strike and the resulting incremental production volume as eligible employees return to work. Warrior Met plans to invest $420-$485 million in 2023 to further strengthen its coal operation.
The Zacks Consensus Estimate for its 2023 and 2024 earnings has moved up by 0.1% and 9.7%, respectively, in the last 60 days. The current dividend yield of the company is 0.48%. The stock has gained 71.3% in the past year.
Warrior Met Coal currently carries a Zacks Rank of 3 (Hold).
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Warrior Met Coal (HCC) : Free Stock Analysis Report
Arch Resources Inc. (ARCH) : Free Stock Analysis Report
Ramaco Resources, Inc. (METC) : Free Stock Analysis Report
