Zacks Industry Outlook Highlights Peabody Energy, Alliance Resource Partners, CONSOL Energy and Warrior Met Coal
January 16, 2023 – Today, Zacks Equity Research discusses Peabody Energy Corp. BTU, Alliance Resource Partners L.P. ARLP, CONSOL Energy CEIX and Warrior Met Col Inc. HCC.
The Zacks Coal industry stocks staged a rebound in 2022 courtesy of global demand and surging natural gas prices. However, in 2023 demand for coal may suffer due to lesser coal utilization in the United States to produce electricity, planned retirement of coal units and utilization of more renewable sources for electricity generation.
The ongoing transition, with utility operators steadily phasing out coal units, will adversely impact the coal industry. Then again, the persisting conflict between Russia and Ukraine is creating fresh demand from coal-importing countries. Hence, coal export from the United States is expected to improve in 2023 from the year-ago level.
Even in case of a drop in coal production, low-cost coal producers like Peabody Energy Corp. should benefit from their met coal and thermal coal production. With improvement in global steel production Alliance Resource Partners L.P., CONSOL Energy and Warrior Met Col Inc. are expected to gain.
The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined by either the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity, and manufacture steel and cement. Per the U.S. Energy Information Administration ("EIA") report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal.
Given the current production rates, coal resources are likely to last many more years. Five states in the United States contribute nearly 70% of yearly production and 60% of coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal industry.
3 Trends Likely to Impact the Coal Industry
New Emission Policy to Hurt Coal Industry: The improvement in demand for coal is short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly lower the demand for coal from the U.S. electricity space. Per EIA, coal-fired electricity generation would drop from 20% in 2022 to 18% in 2023 and further drop to 17% in 2024. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage would fall significantly.
Going forward, coal industry operators are likely to face many difficulties as a number of electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage. Per EIA, total coal consumption in the United States will drop 12.2% in 2023 to 458.5 MMst and further by 3.2% to 444.1 MMst in 2024.
U.S. Coal Production Drops: As per EIA projection, coal production in the United States is expected to drop in 2023 and 2024 after showing an improvement in production volumes in the previous two years. EIA projects U.S. coal production to likely to decline by 11% to about 530 million short tons (MMst) in 2023 and a further 6% to 500 MMst in 2024 was due to an 11% reduction in coal consumption in the electric power sector in 2023 and a further reduction of 3% in 2024. This would hurt coal operators fighting a tough battle with the other sources of energy.
Coal to Benefit From Rising Exports: The coal operators can benefit from the expected rise in coal export volumes. Coal, due to its economical prices compared to other energy sources, is still a viable energy option for many crucial industries across the globe. Per EIA, coal export volume may drop by 1.3% in 2023 to 83.3 MMst but would increase by 11.2% to 92.6 MMst in 2024. Steel production requires a lot of high-quality coal, and nearly 70% of global steel production depends on coal.
The World Steel Association revised its 2023 steel demand outlook and now expects steel volumes to improve by 1% in 2023 to 1814.7 Mt. This expectation is lower than the prior expectation due to high inflation and rising interest rates globally, which may adversely impact coal export volumes in 2023. However, with the continued recovery in steel production, coal exports are expected to pick up from the end of 2023.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Coal industry is a 10-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #232, which places it in the bottom 7% out of 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's earnings growth potential. Since September 2022, the industry's earnings estimates for 2023 have gone down by 24.2%.
Before we present a few coal stocks that you may want to consider, let's take a look at the industry's recent stock market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Coal industry has outperformed the Zacks S&P 500 composite and the Zacks Oil and Gas sector over the past 12 months.
The stocks in the coal industry have gained 54.4% compared with the Zacks Oil-Energy sector's growth of 21.3%. The Zacks S&P 500 composite has declined 16% in the same time frame.
Coal Industry's Current Valuation
Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
The industry is currently trading at a trailing 12-month EV/EBITDA of 2.45X compared with the Zacks S&P 500 composite's 12.03X and the sector's 3.23X.
Over the past five years, the industry has traded as high as 7.6X, as low as 2.34X and at the median of 4.8X.
4 Coal Industry Stocks to Keep a Close Watch On
Peabody Energy: St Louis, MO-based Peabody Energy engages in the coal mining business and has both thermal and metallurgical operations. In 2021, nearly 26% of the company's revenues were derived from five customers with whom it still has 17 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2022 to 2026. This assures a steady flow of revenues.
The Zacks Consensus Estimate for Peabody Energy's 2022 earnings and revenues suggests a year-over-year rise of 118% and 34.3%, respectively. The stock has gained 106.3% over the past year compared with the industry's rally of 52.8%.
Peabody Energy currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Alliance Resource Partners L.P.: Tulsa, OK- based Alliance Resource Partners produces and sells coal to utilities and industrial users in the United States. The firm produces coal from seven mining complexes operated by its subsidiaries. ARLP earns royalty income from coal produced by its mining complexes and royalty income from mineral interests it owns in different basins.
The firm currently has a Zacks Rank #3. The Zacks Consensus Estimate for 2023 earnings per unit and revenues implies a year-over-year rise of 33.5% and 11%, respectively. The stock has gained 36.1% over the past year.
CONSOL Energy: Canonsburg, PA-based CONSOL Energy, currently has a Zacks Rank of 3, which produces and exports bituminous thermal coal. The company owns and operates the Pennsylvania Mining Complex and the Baltimore Marine Terminal, and controls more than 1 billion tons of undeveloped reserves.
The company is consistently operating longwalls and has one of the largest export terminals on the Eastern seaboard. The Zacks Consensus Estimate for 2023 earnings and revenues suggests a year-over-year rise of 157.5% and 35.3%, respectively. The stock has gained 130.6% over the past year.
Warrior Met Coal: Brookwood, AL-based Warrior Met Coal currently has a Zacks Rank #3. The company produces and sells metallurgical coal for metal manufacturers in Europe, South America and Asia.
The company is a low-cost producer of high-quality met coal, enjoys a price advantage and has an annual production capacity of over 7 million metric tons of coal. The Zacks Consensus Estimate for its 2022 earnings and revenues indicates a year-over-year rise of 334.5% and 71.7%, respectively.