Moreover, Walter Energy, Inc. (NYSE:WLT) has undergone a credit rating downgrade, and has been placed on ‘credit watch’ by S&P Ratings, exposing the company to further downgrade risk.
Thermal coal markets also continue to portray a negative picture of the coal industry. Arch Coal Inc (NYSE:ACI) is among the leading thermal coal producers in the U.S. Arch Coal Inc (NYSE:ACI)’s financial health has deteriorated in recent years due to weak coal market conditions. Arch’s stock price has plunged 35% year to date. Lower natural gas prices and the Obama administration’s harsh attitude toward coal usage are among the leading factors for depressed thermal coal markets. Natural gas prices bottomed in April 2012, reaching a level of $1.90 per million British Thermal Units; since then, natural gas prices have increased, but not enough to encourage the usage of coal on a large scale by electricity generators. As long as natural gas prices remain below $4.00 mmBtu, thermal coal markets will remain weak.
Coal companies are selling off their assets to generate liquidity to ensure their survival in these tough industry conditions. Last month, Arch Coal Inc (NYSE:ACI) completed the sale of its Utah and Colorado mines to Bowie Resources for $423 million; the transaction improved the company’s liquidity position. The mines accounted for 2% of the company’s coal reserves. The important takeaway from the transaction was that the mines were the most profitable ones that Arch held. In 2012, the Utah and Colorado mines had an operating margin of $9 per ton, as compared to an operating margin of $2 per ton and $1 per ton at Arch’s Central Appalachian mines and its Powder River Basin, respectively. This sale will therefore hurt the company’s future earnings potential.
SummaryUncertainty is most likely to prevail in the coal industry, due to weak met and thermal coal markets. Supply cuts, a rise in natural gas prices, and favorable government policies are the likely factors to bring some positives for the industry. Also, tough market conditions have made financial flexibility and liquidity vulnerable for coal companies. Given the ongoing and ever-increasing challenges, the coal industry is likely to underperform the broad market in the near future, and coal stocks could experience further drops in prices due to the prevailing uncertainties. Therefore, valuations for coal stocks are expected to remain depressed in the near term.
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The article The Future Is Still Uncertain for Coal originally appeared on Fool.com and is written by Syed Shah.
Syed Shah has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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