Peabody Energy Corporation (NYSE:BTU)
Peabody Energy Corporation (NYSE:BTU)’s international expansion has helped the stock to fight with high coal-to-natural gas substitution at home (in the US). However, now this very fact means that the company may not benefit from a reviving US coal market. Moreover, low demand for met coal and sluggish growth in the international coal market do not bode well for the company. Moreover, the pricey Macarthur transaction also remains a near-term overhang for the company (as the market believes that the company overpaid for Macarthur Coal).
However, despite all that, the company is still viewed favorably at the Street given its medium-to-long run organic growth prospects. Moreover, many investors have bet on the fact that international market for coal might improve in another six months or so. Peabody Energy Corporation (NYSE:BTU)’s large reserve base is another fact that has been appreciated by the market.
The upside case of $49 assumes an 8x forward multiple applied to a projected normalized EBITDA of $2.4 billion. This higher EBITDA value results from assuming an average LT Hard Coking Coal price of $200/tonne vs base case of $180/tonne.
The downside case of $21 assumes a 6.2x forward multiple applied to a projected normalized EBITDA of $1.8 billion. This lower EBITDA value results from assuming an average LT Hard Coking Coal price of $160/tonne.
Cloud Peak Energy Inc. (NYSE:CLD)
Cloud Peak Energy Inc. (NYSE:CLD) has been heavily punished for its high exposure to the US coal market. However, this time around, a rebound in gas prices mean that the stock is definitely poised to rally higher. It screens favorably on two key themes:
(1) As a pureplay Powder River Basin (PRB) producer, it has low costs; and
(2) it has a strong balance sheet.
Though few company-specific catalysts are seen, the eventual development of a West Coast port to export PRB coal to Asia (a number of permits to develop facilities have been filed and are being reviewed by regulators) would be a significant positive development that does not appear reflected in the stock at present.
However, again, this stock faces the same dilemma as Peabody Energy Corporation (NYSE:BTU). Only a limited upside is present due to the improving US coal market as many believe that secular decline of coal demand will remain there in the US. Also, the rebound in gas prices might not be sustainable given the high levels of gas production.
The upside case of $21 assumes a 5x multiple applied to a projected 2015 EBITDA of $350 million. This EBITDA value results from assuming a 2015 PRB coal price of $15/t vs. our base case of $13.5/t.
The downside case of $13 assumes a 6.5x multiple applied to a projected 2013 EBITDA of $195 million. This EBITDA value is a function of assuming a 2015 PRB price of $12.50/t.
CONSOL Energy Inc. (NYSE:CNX)
CONSOL Energy Inc. (NYSE:CNX) Energy has a revenue base pretty similar to Peabody’s. Therefore, the company remains prone to sluggish coal demand in the international market as well as poor met coal demand. In the US, the company derives most of its supplies from the Appalachian Basin, which has one of the finest coals in the world. However, fine quality means that it is expensive and unable to compete with natural gas (unlike coal from PRB, which is cheap and of low quality)
That said, CONSOL Energy Inc. (NYSE:CNX) is well positioned to survive the challenges of the Appalachian region as the low cost producer with Atlantic Basin export opportunities. Moreover, the company has a compelling sum of the parts valuation and option value within its gas acreage position.
The upside case of $50 assumes a 6.5x forward multiple applied to a projected 2015 coal segment EBITDA of $1.5 billion. This higher EBITDA value results from assuming a 2015 met coal price of $200/tonne vs. our base case of $180/tonne.
The downside case of $30 assumes a 4.5x forward multiple applied to a projected 2015 coal segment EBITDA of $1.3 billion. This lower EBITDA value results from assuming a 2015 met coal price of $160/tonne.
Foolish Bottom Line
The rebound in natural gas prices is definitely an emerging theme that money managers are keenly looking into. However, no one is sure for how long this rise in gas prices will remain there. These prices are dependent on lots of factors like gas drilling/supplies, government approval to export LNG, discovery of more shale regions, weather (gas demand rises in cool weather) and so on. On the other hand, coal players with strong exposure to met coal and international thermal coal market seems a more reliable theme to invest. Therefore, I will suggest investors take a long position in CONSOL Energy Inc. (NYSE:CNX) and Peabody Energy Corporation (NYSE:BTU) and a short position in Cloud Energy when making a long-term investment.
The article 2 Coal Stocks to Buy, 1 to Sell originally appeared on Fool.com and is written by Zain Abbas.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
