Are Coal Stocks Crazy Investments?

by Aaron Levitt | November 7, 2013 9:21 am

It’s been a wild and bumpy ride for investors in coal stocks over the last few years.

ycharts chart 50 300x194 Are Coal Stocks Crazy Investments?
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Big name coal stocks like Peabody Energy (BTU[1]), Arch Coal (ACI[2]) and Cliffs Natural Resources (CLF[3]) have rebounded slightly over the last month, but have still spent much of the past few quarters licking their wounds.

So are coal stocks like ACI, BTU, and CLF crazy investments — or bargains?

Well, coal mining has suffering as our abundant and cheap natural gas reserves — unearthed via the miracle of fracking[4] — continue to take more and more market share in the power generation department.

On top of that, coal stocks like BTU, ACI and CLF have to worry about Obama. His administration has made it clear that the “dirty” fossil fuel shouldn’t be a major contributor to America’s electricity production.

And BTU, ACI, CLF and others are also facing pending EPA rules[5] and regulations which cut carbon emissions coal-burning facilities and have essentially put the kibosh on the fuel’s standing as “old king coal.”

Add in lower exports to key emerging market nations like China[6] and India due to their own growing domestic coal mining sectors, along with export completion from other nations, and it seems like a recipe for disaster for coal stocks.

The Trouble With Coal Stocks

Since the recession, the coal mining industry has had a rough time. Since 2008, production at BTU, ACI and other coal stocks like Alpha Natural Resources (ANR[7]) has continued to slip. Over the last five years, total coal mining production has dropped by nearly 200 million short tons. That’s a pretty significant amount, driven by the new market dynamics facing the coal industry .

Namely, the birth of cheap and abundant natural gas. Utilities continue to add new facilities that burn the fuel in spades as the E&P industry fracks its way to glory. According to the Sierra Club,[8] the recently announced closure of the Brayton Point power plant in Massachusetts brings the number of closed U.S. coal plants total to 150 since just 2010.

Bad news for coal stocks: More closings more could be on the way.

Both coal mining companies BTU and ACI see a dearth of coal plant closures coming in the next few years, with Peabody predicting that 70 gigawatts of coal power will be retired over the next three years alone. That’s certainly possible, with coal-heavy utilities American Electric Power (AEP[9]) and Duke Energy (DUK[10]) working hard to reduce their exposure to the fuel by significant percentages.

Meanwhile, exports at CLF, BTU and James River (JRCC[11]) haven’t lived up to snuff this year either. This time last year, coal mining execs had estimated that exports would rise by an additional 185 million tons. Well, the coal mining sector is on pace to see a 5% decline[12] from last year’s export amount of 125 million tons.

Many analysts predict the decline will quicken pace over the next few years as key demand drivers are getting their coal from suppliers in Australia, Canada, Mozambique and even Russia.

All of this has been reflected in coal stocks earnings over the last few quarters.

On its latest earnings release, BTU reported a 13% decline in revenue[13], while swinging to a 10-cent-per-share loss. That compares to a 16-cent-per-share profit in 2012.

That echoes similar results from rival coal stocks. ACI saw revenue plunge by 19% for its latest earnings release, while CLF coal operations saw revenues per ton decrease by 23%. Not to be outdone, ANR’s revenue plunged 27% and the company announced that it was laying-off 230 workers and lowering CAPEX spending across its mines.

None of this exactly points to rosy picture for the future of coal mining.

Skip Coal Stocks

Considering just how dour the situation is for the U.S. coal mining industry and coal stocks like ACI and Oxford Resource Partners (OXF[14]), they just might be “crazy investments” at this point. The shake-out in the sector continues to carry on. And if it wasn’t for cost controls, sector earnings would be much much worse.

As the shake-out persists and natural gas continues to eat coal’s lunch, the investment merit of coal stocks leaves much to be desired. Don’t be fooled into bottom-fishing these beaten down names. There might be a quick buck to be made here or there, but there’s little to no long-term potential.

As a result, it’s probably better to skip a direct bet on the sector and names like ACI, BTU and CLF. There’s simply too much uncertainty surrounding coal mining.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BTU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BTU
  2. ACI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACI
  3. CLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLF
  4. the miracle of fracking: http://investorplace.com/2013/11/natural-gas-stocks/#.UnpQGzYo6Ul
  5. pending EPA rules: http://investorplace.com/2013/09/sell-coal-stocks-king-coal-gets-dealt-its-final-blow/
  6. China: http://investorplace.com/2013/11/china-stocks-demographics-collapse/
  7. ANR: http://studio-5.financialcontent.com/investplace/quote?Symbol=ANR
  8. Sierra Club,: http://content.sierraclub.org/press-releases/2013/10/coal-decline-150-coal-plants-set-retirement
  9. AEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEP
  10. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  11. JRCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JRCC
  12. 5% decline: http://www.nytimes.com/2013/09/14/business/energy-environment/us-coal-companies-scale-back-export-goals.html?pagewanted%253Dall&_r=0
  13. revenue: http://www.foxbusiness.com/industries/2013/10/17/peabody-energy-posts-3q-loss-shares-rally-on-beat/
  14. OXF: http://studio-5.financialcontent.com/investplace/quote?Symbol=OXF

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