Arch Coal Restructuring Only Buys Time Before a Bigger, Inevitable End

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Another one bites the dust. Arch Coal (ACI) has now officially followed in the footsteps Alpha Natural Resources (ANRZQ), Patriot Coal Corp., and several other, smaller coal miners over the past couple of years by filing bankruptcy.

Arch Coal Restructuring Only Buys Time Before a Bigger, Inevitable EndACI stock, which was already down about 99% from its 2011 peak, managed to lose another 50% of its value from Friday’s close.

The sharp plunge in the price of Arch Coal stock would vaguely suggest the market was shocked to hear the news, although with an honest introspection it can’t be all that surprising.

Aside from the fact that (former) industry icons Alpha Natural Resources and Patriot Coal had already reached the point of insolvency in the wake of sustained tepid coal prices, Arch Coal itself has been losing money and bleeding cash for years now.

Nobody wants to throw away good money after bad when there’s little reason to believe coal has any kind of future.

Arch Coal Files for Bankruptcy

Operationally speaking, Arch Coal stands out from most of its peers because its fiscal issue is more of a capital structure one as opposed to an operational one. That’s why it intends to remain operational before, during and after its Chapter 11 petition proceedings. Its primary goal is the elimination of $4.5 billion worth of its $6.5 billion in debt.

The initial effort to sidestep bankruptcy endeavored to exchange debt with a longer-term maturity for bonds expiring in the near future. Lenders weren’t satisfied with that deal, however, fearing that deal would put them at the bottom of the proverbial totem pole. The new proposal would mostly exchange ACI stock for a wide swath of the company’s debt… though at this point it’s not clear if the company’s stock or debt has any meaningful value.

CEO John Eaves explained:

“After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet.”

The Bigger Picture

While the number-crunchers have accurately observed it’s the high level of leverage (following an ill-timed $3.4 billion purchase of International Coal Group in 2011) that’s making it tough for Arch Coal to remain solvent. It would be short-sighted to think a Chapter 11 petition wouldn’t have materialized at some point in the company’s future. It is about the plunging price of coal.

For perspective, in 2011, thermal coal prices were in excess of $140 per short ton. Oil prices were holding well above $100 per barrel, and natural gas — the biggest direct competitor to coal — was getting comfortable above $4 per million BTU (and had topped $12 just a few years earlier). At the time, coal made the most mathematical sense as a source of energy for electricity production plants.

Now natural gas is priced at just above $2 per million BTU, crude oil is trading at $32 per barrel. Accordingly, coal is presently priced at just a tad over $40 per short ton. It’s not a price that many, if any, coal miners can survive for very long. This includes Arch Coal, if only because natural gas is now the relatively cheaper choice of fuel for electricity plants to burn; never even mind the fact that it’s cleaner than coal.

As evidence of this multifaceted paradigm shift, last year natural gas upended coal as the nation’s leading source of electricity. The only change in the meantime is a wider lead from natural gas.

Bottom Line for ACI Stock

The hope of maintaining its current output and sustaining existing operations is admirable, though in the end, most likely pointless for Arch Coal stock.

Coal as an industry is dying, if not because of waning public opinion, then because of legislation. If not because of legislation, then because fracking has made it possible for drillers and explorers to tap into a massive reserve of natural gas right here at home.

It’s most likely dying, though, due to a combination of all three factors.

Odds are good we’ll be hearing bankruptcy news from Arch Coal again sometime in the future, and next time it won’t be a restructuring. Odds are good the next time it will be the shuttering of its operations for good.

The math against the backdrop of safer, cleaner alternatives just doesn’t make sense.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/arch-coal-restructuring-buys-time-bigger-inevitable-end/.

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