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Coal companies provide much of the fuel that is used for baseload electricity production in the United States. While very few, if any, coal plants are currently under construction, coal fired power plants account for approximately 44.5% of U.S. power production. This is more than natural gas and nuclear combined, which totaled 43.5%.

The United States has abundant coal resources available with 486 billion short tons available. However, a much smaller portion of this is available for economic recovery. In fact, there were only 17.5 billion short tons of reserves at producing mines in 2009. For the past couple years, United States production has been around 1.1 billion short tons per year, ranging from a high of 1.17 billion in 2008 to a recent low of 1.07 in 2009.

At this rate, there is no shortage of coal in the United States. The more likely limiting factor to the expansion of coal are environmental concerns and possible concern around carbon legislation.

Coal Companies

Zacks.com identified 32 publicly traded coal companies; however, I'll try to limit the analysis to the larger U.S. based companies. Some coal companies are organized as master limited partnerships while others are organized as more traditional corporations. The following table shows a list of these companies.

Coal Companies Ranked by Market Capitalization


Ticker Name April 21 Close Annual Sales ($ millions) Market Cap ($ millions)
BTU Peabody Energy Corporation 66.02 6,860 17,865
CNX CONSOL Energy Inc. 51.26 5,236 11,615
WLT Walter Energy, Inc. 136.38 1,588 7,256
MEE Massey Energy Company 66.81 3,039 6,912
ANR Alpha Natural Resources, inc. 57.08 3,917 6,877
ACI Arch Coal, Inc. 34.64 3,186 5,636
NRP Natural Resource Partners LP 34.12 301 3,618
AHGP Alliance Holdings GP, L.P. 50.60 1,610 3,029
ARLP Alliance Resource Partners, L.P. 76.48 1,610 2,813
PCX Patriot Coal Corporation 26.09 2,035 2,382
ICO International Coal Group, Inc. 10.87 1,166 2,216
PVR Penn Virginia Resource Partners LP 27.91 864 1,982
CLD Cloud Peak Energy Inc 19.94 1,371 1,214
JRCC James River Coal Company 22.77 701 807
RNO Rhino Resource Partners LP 25.16 306 312
OXF Oxford Resource Partners, LP 26.15 357 270
LLEN L&L Energy, Inc. 7.28 109 234
WLB Westmoreland Coal Company 17.05 506 223
OTC:PUDA Puda Coal, Inc. 6.00 325 180

Data is provided by Zacks.com services and was current as of April 21, 2011.

The first observation is that NRP and WLT have pretty high price to sales ratios which are also reflected by the other multiples.

Valuation Multiples Vary Widely Across Coal Companies

When comparing valuation metrics, I'll keep the MLPs separated from the other companies since the MLPs have certain tax implications which could impact valuation multiples. The following table ranks companies in increasing EV/EBITDA ratio and groups the corporations separately from the partnerships.

Valuation Multiples


Ticker Type P/B MC/OCF EV/OCF EV/EBTIDA Leverage
LLEN Corporation 1.6 4.8 4.7 3.5 -3%
CLD Corporation 1.2 2.0 2.7 4.0 31%
JRCC Corporation 2.6 4.1 3.6 4.4 -12%
WLB Corporation NA 4.9 10.1 5.3 106%
ACI Corporation 2.5 9.4 12.0 9.8 27%
WLT Corporation 10.6 14.3 14.0 10.3 -2%
BTU Corporation 3.7 4.6 5.0 10.9 8%
CNX Corporation 3.9 10.9 14.4 12.3 31%
ICO Corporation 2.9 13.2 13.9 12.9 5%
ANR Corporation 2.6 8.0 8.0 15.9 0%
MEE Corporation 3.8 25.8 29.3 21.9 14%
PCX Corporation 2.8 65.6 72.8 63.0 11%
ARLP Partnership 6.2 6.0 6.8 6.4 14%
AHGP Partnership 6.6 9.4 10.6 6.9 13%
OXF Partnership 2.5 6.8 9.3 7.2 38%
RNO Partnership NA 5.7 12.0 9.7 6%
PVR Partnership 3.4 9.7 13.1 14.9 35%
NRP Partnership 4.4 17.1 19.9 16.7 17%
Data is provided by Zacks.com services and current as of April 21, 2011 with data for MEE, RNO, WLB, PCX, OXF, PUDA, WLB, LLEN from Yahoo!Finance. MC is market capitalization, EV is enterprise value, OCF is operating cash flow, P/B is price to book. In this case, leverage is defined as (Debt - Balance Sheet Cash)/Equity so it is very possible for a company to have negative leverage.

The first observation is that the smaller companies tend to have the lower valuation multiples with the exceptions of ANR and BTU.

Summary of Companies

Data in summaries is from zacks.com for all statistics except yahoo!finance for cash balances and debt levels and EBITDAs for MEE, RNO, PCX, LLEN, OXF, PUDA and WLB.

Peabody Energy Corporation (NYSE: BTU) - BTU has a market capitalization of $17.9 billion. BTU closed recently at $66.02 per share with a dividend yield of 0.51 percent. BTU has an enterprise value of $19.3 billion. BTU shows a trailing P/E ratio of 20.6x which decreases compared to its forward P/E which is 14.6x. This suggests strong earnings per share growth. Its low debt level should not be a challenge. BTU just closed at $66.02 per share which is 85.5% above its 52-week low of $35.59 and 10.1% below its 52-week high of $72.71 per share. BTU has a medium valuation at 10.9x by Enterprise to EBITDA measures. BTU has a low price to sales ratio at 2.5x. On an operating cash flow basis, BTU appears to be cheaply valued.

CONSOL Energy Inc. (NYSE: CNX) - CNX has a market capitalization of $11.6 billion. CNX closed recently at $51.26 per share with a dividend yield of 0.78 percent. CNX has an enterprise value of $15.3 billion and shows some financial leverage. CNX shows a trailing P/E ratio of 22.5x which decreases compared to its forward P/E which is 18.2x. This suggests some earnings per share growth. Its modest debt level appears to be manageable. CNX just closed at $51.26 per share which is 64.2% above its 52-week low of $31.21 and 8.3% below its 52-week high of $55.49 per share. CNX has a somewhat high valuation at 12.3x by Enterprise to EBITDA measures. CNX has a low price to sales ratio at 2.2x. On an operating cash flow basis, CNX appears to have little upside improvement.

Walter Energy, Inc. (NYSE: WLT) - WLT has a market capitalization of $7.3 billion. WLT closed recently at $136.38 per share with a dividend yield of 0.37 percent. WLT has an enterprise value of $7.1 billion and shows negative financial leverage. WLT shows a trailing P/E ratio of 16.3x which decreases compared to its forward P/E which is 9.2x. This suggests strong earnings per share growth. Its low debt level should not be a challenge. WLT just closed at $136.38 per share which is 130.3% above its 52-week low of $59.23 and 3.5% below its 52-week high of $141.17 per share. WLT has a medium valuation at 10.3x by Enterprise to EBITDA measures. WLT has a high price to sales ratio at 4.3x. On an operating cash flow basis, WLT appears to have little upside improvement.

Massey Energy Company (NYSE: MEE) - MEE has a market capitalization of $6.9 billion. MEE closed recently at $66.81 per share with a dividend yield of 0.36 percent. MEE has an enterprise value of $7.9 billion and shows some financial leverage. Its low debt level should not be a challenge. MEE just closed at $66.81 per share which is 153.9% above its 52-week low of $26.31 and 4.9% below its 52-week high of $70.06 per share. MEE has a high valuation at 21.9x by Enterprise to EBITDA measures. MEE has a low price to sales ratio at 2.3x. On an operating cash flow basis, MEE appears to be possibly overpriced.

Alpha Natural Resources, inc. (NYSE: ANR) - ANR has a market capitalization of $6.9 billion. ANR closed recently at $57.08 per share. ANR has an enterprise value of $6.9 billion and shows a little financial leverage. ANR shows a trailing P/E ratio of 26.4x which decreases compared to its forward P/E which is 12.1x. This suggests strong earnings per share growth. Its low debt level should not be a challenge. ANR just closed at $57.08 per share which is 78% above its 52-week low of $32.07 and 18% below its 52-week high of $67.38 per share. ANR has a somewhat high valuation at 15.9x by Enterprise to EBITDA measures. ANR has a low price to sales ratio at 1.8x. On an operating cash flow basis, ANR appears to be a good value with upside.

Arch Coal, Inc. (NYSE: ACI) - ACI has a market capitalization of $5.6 billion. ACI closed recently at $34.64 per share with a dividend yield of 1.15 percent. ACI has an enterprise value of $7.2 billion and shows some financial leverage. ACI shows a trailing P/E ratio of 30.4x which decreases compared to its forward P/E which is 13.8x. This suggests strong earnings per share growth. Its modest debt level appears to be manageable. ACI just closed at $34.64 per share which is 79.3% above its 52-week low of $19.32 and 4% below its 52-week high of $36.04 per share. ACI has a medium valuation at 9.8x by Enterprise to EBITDA measures. ACI has a low price to sales ratio at 1.8x. On an operating cash flow basis, ACI appears to be a good value with upside.

Natural Resource Partners LP (NYSE: NRP) - NRP has a market capitalization of $3.6 billion. NRP closed recently at $34.12 per share with a dividend yield of 6.33 percent. NRP has an enterprise value of $4.2 billion and shows some financial leverage. NRP shows a trailing P/E ratio of 22.5x which decreases compared to its forward P/E which is 20.7x. This suggests mild earnings per share growth. Its low debt level should not be a challenge. NRP just closed at $34.12 per share which is 64.8% above its 52-week low of $20.71 and 9.8% below its 52-week high of $37.48 per share. NRP has a high valuation at 16.7x by Enterprise to EBITDA measures. NRP has a very high price to sales ratio at 12x. On an operating cash flow basis, NRP appears to be highly valued.

Alliance Holdings GP, L.P. (NASDAQ: AHGP) - AHGP has a market capitalization of $3 billion. AHGP closed recently at $50.6 per share with a dividend yield of 4.17 percent. AHGP shows a trailing P/E ratio of 17.3x which decreases compared to its forward P/E which is 15.3x. This suggests some earnings per share growth. Its modest debt level appears to be manageable. AHGP just closed at $50.6 per share which is 86.1% above its 52-week low of $27.19 and 14% below its 52-week high of $57.68 per share. AHGP has a low valuation at 6.9x by Enterprise to EBITDA measures. AHGP has a low price to sales ratio at 1.9x. On an operating cash flow basis, AHGP appears to be a good value with upside.

Alliance Resource Partners, L.P. (NASDAQ: ARLP) - ARLP has a market capitalization of $2.8 billion. ARLP closed recently at $76.48 per share with a dividend yield of 4.5 percent. This suggests mild earnings per share growth. Its modest debt level appears to be manageable. ARLP just closed at $76.48 per share which is 92.3% above its 52-week low of $39.78 and 8.9% below its 52-week high of $83.25 per share. ARLP has a low valuation at 6.4x by Enterprise to EBITDA measures. ARLP has a low price to sales ratio at 1.8x. On an operating cash flow basis, ARLP appears to be a good value with upside.

Patriot Coal Corporation (NYSE: PCX) - PCX has a market capitalization of $2.4 billion. PCX closed recently at $26.09 per share. Its low debt level should not be a challenge. PCX just closed at $26.09 per share which is 159.6% above its 52-week low of $10.05 and 9% below its 52-week high of $28.44 per share. PCX has an overpriced valuation at 63x by Enterprise to EBITDA measures. PCX has a low price to sales ratio at 1.1x. On an operating cash flow basis, PCX appears to be overpriced.

International Coal Group, Inc. (NYSE: ICO) - ICO has a market capitalization of $2.2 billion. ICO closed recently at $10.87 per share. ICO shows a trailing P/E ratio of 40.3x which decreases compared to its forward P/E which is 17.2x. This suggests strong earnings per share growth. Its low debt level should not be a challenge. ICO just closed at $10.87 per share which is 196.2% above its 52-week low of $3.67 and 4.8% below its 52-week high of $11.39 per share. ICO has a somewhat high valuation at 12.9x by Enterprise to EBITDA measures. ICO has a low price to sales ratio at 1.9x. On an operating cash flow basis, ICO appears to have little upside improvement.

Penn Virginia Resource Partners LP (NYSE: PVR) - PVR has a market capitalization of $2 billion. PVR closed recently at $27.91 per share with a dividend yield of 6.74 percent. PVR shows a trailing P/E ratio of 29.7x which decreases compared to its forward P/E which is 19.1x. This suggests strong earnings per share growth. Its modest debt level appears to be manageable. PVR just closed at $27.91 per share which is 50.1% above its 52-week low of $18.59 and 3.9% below its 52-week high of $29 per share. PVR has a somewhat high valuation at 14.9x by Enterprise to EBITDA measures. PVR has a low price to sales ratio at 2.3x. On an operating cash flow basis, PVR appears to be a good value with upside.

Cloud Peak Energy Inc (NYSE: CLD) - CLD has a market capitalization of $1.2 billion. CLD closed recently at $19.94 per share. CLD shows a trailing P/E ratio of 11.2x which increases compared to its forward P/E which is 11.3x. This suggests a very small anticipated earnings per share decline. Its modest debt level appears to be manageable. CLD just closed at $19.94 per share which is 51.1% above its 52-week low of $13.2 and 21.3% below its 52-week high of $24.18 per share. CLD has a low valuation at 4x by Enterprise to EBITDA measures. CLD has a very low price to sales ratio at 0.9x. On an operating cash flow basis, CLD appears to be undervalued.

James River Coal Company (NASDAQ: JRCC) -JRCC has a market capitalization of $0.8 billion. JRCC closed recently at $22.77 per share. JRCC shows a trailing P/E ratio of 8.1x which increases compared to its forward P/E which is 11x. This suggests an earnings decline. Its high debt level could prove to be challenging. JRCC just closed at $22.77 per share which is 55.2% above its 52-week low of $14.67 and 17.9% below its 52-week high of $26.84 per share. JRCC has a low valuation at 4.4x by Enterprise to EBITDA measures. JRCC has a low price to sales ratio at 1.2x. On an operating cash flow basis, JRCC appears to be cheaply valued.

Oxford Resource Partners, LP (NYSE: OXF) - OXF has a market capitalization of $0.3 billion. OXF closed recently at $26.15 per share with a dividend yield of 6.69 percent. Its modest debt level appears to be manageable. OXF just closed at $26.15 per share which is 57.3% above its 52-week low of $16.62 and 8.4% below its 52-week high of $28.34 per share. OXF has a low valuation at 7.2x by Enterprise to EBITDA measures. OXF has a very low price to sales ratio at 0.8x. On an operating cash flow basis, OXF appears to be a good value with upside.

L&L Energy, Inc. (NASDAQ: LLEN) - LLEN has a market capitalization of $0.2 billion. LLEN closed recently at $7.28 per share. Its low debt level should not be a challenge. LLEN just closed at $7.275 per share which is 49.7% above its 52-week low of $4.86 and 80.5% below its 52-week high of $13.13 per share. LLEN has a low valuation at 3.5x by Enterprise to EBITDA measures. LLEN has a low price to sales ratio at 1.1x. On an operating cash flow basis, LLEN appears to be cheaply valued.

Puda Coal, Inc. (AMEX: PUDA) - PUDA had an equity market capitalization of $0.2 billion at its last recorded stock price of $6.00. This price is 174.5% below its 52-week high of $16.47 per share. PUDA trading has been halted and is the subject of several pieces of litigation alleging fraud and other misconduct.

Rhino Resource Partners LP (NYSE: RNO) - RNO has a market capitalization of $0.6 billion. RNO closed recently at $25.16 per share with a dividend yield of 1.67 percent. Its low debt level should not be a challenge. RNO just closed at $25.16 per share which is 19.2% above its 52-week low of $21.1 and 8.5% below its 52-week high of $27.31 per share. RNO has a medium valuation at 9.7x by Enterprise to EBITDA measures. RNO has a low price to sales ratio at 2.6x. On an operating cash flow basis, RNO appears to have little upside improvement.

Westmoreland Coal Company (AMEX: WLB) - WLB has a market capitalization of $0.2 billion. WLB closed recently at $17.05 per share. Its high debt level could prove to be challenging. WLB just closed at $17.05 per share which is 131% above its 52-week low of $7.38 and 0.5% below its 52-week high of $17.14 per share. WLB has a low valuation at 5.3x by Enterprise to EBITDA measures. WLB has a very low price to sales ratio at 0.4x. On an operating cash flow basis, WLB appears to be cheaply valued possibly due to its high leverage.

Issues

A couple quick comments about where this analysis could be improved.

  1. Reserve life - When looking at any sort of extractive company, it is always important to check the amount of reserves. I previously wrote an analysis that showed for some gold stocks their low valuation multiples did not necessarily mean they were undervalued since they simply had fewer reserves than companies with higher multiples.
  2. Carbon legislation - In looking at this sector, I'm not sure I would focus on it outside of the context of looking at basic material stocks. An investor could very well look at these companies and decide that their understanding of the potential impact of carbon legislation was such that they could not make good investment decisions. Different market participants produce different ratios of steam coal (power production) relative to metallurgical coal (used in steel production). However, by the same token, it is possible that the sector is overlooked just for these concerns.
  3. Fundamental analysis - The large variations in valuation multiples are somewhat perplexing. This analysis is more of a starting point to due further research than providing any final recommendation.
  4. Data sources - Using both Zacks.com and Yahoo!Finance creates some inconsistencies for trailing twelve month values. For example Yahoo!Finance shows ANR's EBITDA (ttm) to be $792 million while Zacks.com shows it at $432 million. The 2010 10-K filing shows the EBITDA from continuing operations to $769 million. Furthermore reviewing a couple other companies showed that EBITDAs are often somewhat unstable, hence more detailed analysis is necessary rather than just a single point analysis that valuation multiples provide. Possibly the company just had an unusually good or bad year in the last 12 months. Most of these points circle back to point 3 around fundamental analysis. There is no substitute for digging through a companies SEC filings.

Conclusion

As a survey view there are a couple opportunities. All would require some additional analysis.

  1. Potential longs - CLD, ACI, and BTU represent larger companies with potential upside due to somewhat lower valuation multiples. BTU has low valuations to OCF, but a relatively high EV/EBITDA multiple.
  2. Small cap long - JRCC might be an interesting small cap stock given its relatively low market valuations.
  3. Dividends - investors would potentially be drawn to the partnership companies that provide meaningful payouts. Among these, AHGP, ARLP and OXF look interesting due to their lower multiples. PVR, a stock I suggested as a basic material dividend stock, seems more highly valued here. However, PVR is about 10x the size of OXF.
  4. Possible shorts - based on this quick review, MEE might be a possible short due to its higher valuation. However, 2010 did not appear to be a strong year for MEE in terms of most metrics. EBITDA and net income dipped substantially from 2009 results. However, according to Yahoo!Finance there are short shares representing about 22% of its float. PCX also has high valuation multiples and further checking seems to suggest that 2010 was also just a poor year. (Operating profit dropped from around $150 million in 2009 to essentially 0)

Sources: Power production and coal statistics are for 2009 and from the Energy Information Administration at eia.doe.gov.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

Source: Investment Opportunities in Coal Mining