Don't Expect Another Earnings Surprise From Alpha Natural Resources

Aug.14.14 | About: Alpha Natural (ANRZQ)

Summary

Alpha Natural Resources surprised investors with lower than expected operating costs.

Going forward the Energy Information Administration forecasts lower US coal production.

While it may look attractive at these levels, investors will not likely see any price appreciation in the near term.

Alpha Natural Resources, Inc. (ANR) has fallen almost 60% over the past six months due to lower demand for thermal and metallurgic coal. While it bounced up slightly after the 2nd Quarter earnings release and a smaller than expected loss, investors should hold off on getting in on coal before coal picks up.

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The Future of Coal

The Energy Information Administration (EIA) just published the Short Term Energy Outlook, and it paints a pretty grim picture for coal. The US is projected to lower coal consumption through the next few years, with a projected decrease in the amount of short tons consumed in 2015.

(Source: eia.gov)

This lower coal consumption will be driven by lower requirements for coal to generate electrical power within the US. While there will be some spikes during the winter and summer months, coal is being displaced in power generation in the US.

(Source: eia.gov)

While there will be lower US consumption, the EIA is seeing a slight uptick in the Western region coal production.

(Source: eia.gov)

The Future Of Alpha Natural Resources

While Alpha is still one of the largest coal producers, it will not likely return to the glory days of being a $20-60 stock with a market cap of $5-10 Billion. Instead Alpha is facing the fact that its stock price will probably stay around these levels for the near future.

Instead of focusing on consumption in the US, Alpha is counting on global demand to sustain business. One of the contributors to the better than forecasted quarterly results was an improvement in operating costs from $65.73/ton down to $62.01/ton. While this almost $3 cost reduction may seem small, the 6% decrease provided an estimated $45 million in additional revenue for the company.

The company has been aggressive in cost cutting measures to get to the level it is at. This has involved layoffs, proposed layoffs, and shuttering mines with higher operating costs. The company cannot increase volume while keeping production costs at the lower levels.

While the US market looks bleak, the company hopes to tap into the global growth to help sustain the company. That may be the only way the company can survive until approaching breakeven point or returning to profitability.

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(Source: company presentation)

As much as the company may attempt to tap into the global market, and attempt to adjust volume and decrease costs, low coal prices may negate any of those efforts.

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(Source: eia.gov)

Conclusion

Going forward, the slowdown in the US demand for coal will keep Alpha from being profitable in the near term. Investors shouldn't expect another surprise quarter with lower production costs or higher than expected revenues. The future of Alpha looks bleak and investors should avoid investing any money they can't afford to lose.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.