Why survival is for the fittest of US coal producers

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Walter Energy

Met coal producers (KOL) are the worst hit in the current energy environment. Based on our analysis so far, we can conclude that the higher the revenue share of met coal, the steeper the stock prices fell in 2014. With huge debt on the books and cash burning operations, Walter Energy, Inc. (WLT) is the riskiest bet. And, unlike other major met coal producers such as Alpha Natural Resources, Inc. (ANR), the company doesn’t have a diversified product portfolio.

Alpha Natural Resources and Arch Coal

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Alpha Natural Resources and Arch Coal Inc are not much less risky. That said, these companies are better off than Walter Energy because of a diversified product mix that includes low-cost Powder River Basin coal. Alpha Natural Resources showed spectacular cost performance in the last quarter and recently idled more mines in the high-cost Appalachians. The impact of these actions on cash flows could be visible in several years. Meanwhile, both these companies have elevated debt levels.

Peabody Energy and Cloud Peak

Peabody Energy Corporation (BTU) also produces met coal. The company’s advantage over other met coal producers is that its met coal mines are located in Australia. If met coal market picks up because of Asian demand, Peabody Energy will be the first to benefit. Peabody Energy also benefits from a large presence in the Powder River Basin. The company has substantial debt, but it’s spread across a number of years, with a large maturity of $1.5 billion to repay in 2018. The company can resort to selling non-core assets in case of a liquidity crisis.

Cloud Peak Energy Inc. (CLD) is the safest bet. The company doesn’t have much debt on its balance sheet, and its available liquidity is sufficient to take care of what debt it has. Also, the company is generating free cash flows. Meanwhile, Cloud Peak Energy faces concentration risk because all its mines are located in the Powder River Basin.

The bottom line

Met coal producers are more likely to go bankrupt, if no one acquires them first. Among thermal coal producers, those in the Appalachians have the greater possibility of insolvency because of the high cost of mining there and cash burning operations. Producers in the Illinois Basin are somewhat better off, while those in the Powder River Basin are safest.

You should consider global market conditions and regional economics when allocating your assets to the coal industry. Reading Market Realist’s series, Must-know: US coal regions and producers with the best prospects, should help you learn more about U.S. coal producers.

Visit the Coal section of our Energy & Poser pages for more analysis on coal producers and the industry.

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