In December 2014, I wrote an article titled "Coal: A Casualty Of War Or Creative Destruction?" based on market data from Nov. 26, 2014. I also looked at data from the U.S. Energy Information Administration (EIA) regarding U.S/ electricity generation, President Obama's actions, and trends in Europe and China. In my analysis, I looked at 13 publicly traded U.S.-based coal companies and noted that while four were operating at a profit, eight were posting negative EPS data and one -- Patriot (OTCQB:PCXCQ) -- had filed for bankruptcy protection. It seemed to me that when eight out of 12 companies in the same mature industry are operating at a loss, the industry is looking at systemic challenges.
Today, things are worse. Only two of these 13, Alliance Resources (NASDAQ:ARLP) and Natural Resource Partners (NYSE:NRP), are operating at a profit. Eight of the companies -- Cloud Peak Energy (NYSE:CLD), Consol Energy (NYSE:CNX), Rhino Resource Partners (OTCQB:RHNO), Westmorland Coal (NASDAQ:WLB), Arch Coal (ACIIQ), Alpha Natural Resources (OTCPK:ANRZQ), Peabody Energy (OTCPK:BTUUQ), and Walter Energy (OTCPK:WLTGQ) -- are operating at a loss. Four of these companies are in bankruptcy protection. Two, Oxford (OXF) and Patriot Coal (OTCQB:PCXCQ), are no longer listed on exchanges.
One additional company, Foresight Energy Partners (NYSE:FELP), which was not on my radar in 2014, is also operating at a loss. As noted above, ARLP and NRP are operating at a profit. ARLP seems to be doing well. It recently reported EPS of $0.91, almost 50% higher than $0.61 reported last year and is expected to post earnings of $1.39 per share for fiscal year 2017.
NRP, however, appears to be struggling. While NRP recently reported net income of $16.2 million, up from a loss of $322 million last year, NRP also reported net cash of $35.9 million for Q3 2016, down from $47.2 million in Q3 2015. Similarly, NRP reported EBITDA at $58.9 million for Q3 2016, down from $70.4 million for Q3 2015.
Table 1 below shows the EPS data for these 13 coal companies on Nov. 26, 2014, Nov. 3, 2016, and Nov. 25, 2016.
|Arch Coal||ACI / ACIIQ||-3.26||-141.58||-141.58|
|Alpha||ANR / ANRZQ||-5.03||-3.18||-3.18|
|Peabody Energy||BTU / BTUUQ||-2.56||-57.09||-54.33|
|Cloud Peak Energy||CLD||1.42||-2.6||-2.6|
|Walter Energy||WLT / WLTGQ||-8.07||-35.19||-35.19|
|Table 1: EPS Data|
The market capitalization data, table 2 below, repeats the story.
|Company||Symbol||$ Millions||$ Millions||$ Millions|
|Arch Coal||ACI / ACIIQ||510||0||0|
|Alpha||ANR / ANRZQ||500||1||1|
|Peabody Energy||BTU / BTUUQ||2,940||155||204|
|Cloud Peak Energy||CLD||750||407||345|
|Walter Energy||WLT / WLTGQ||220||5||15|
|Table 2: Market Capitalization|
As noted, Foresight Energy was off my radar in 2014. However, with a market capitalization of $863.28 million and operating at a loss, with EPS of -1.21, FELP seems reflective of the general macroeconomic trend in the coal industry.
Taking it a step further, I looked at the EPS and number of shares outstanding for these companies (table 3 below).
|EPS and Shares Outstanding|
|Arch Coal||ACI / ACIIQ||-141.58||21.3|
|Alpha||ANR / ANRZQ||-3.18||222.51|
|Peabody Energy||BTU / BTUUQ||-54.33||18.5|
|Cloud Peak Energy||CLD||-2.6||61.46|
|Walter Energy||WLT / WLTGQ||-35.19||80.75|
Multiplying earnings (losses) per share by the number of shares outstanding gives us a look at total current earnings (losses).
|Market Capitalization v Total Earnings (Losses)|
|M Cap v Earnings or Loss||MCAP||Earnings (Losses)|
|Company||Symbol||$ Millions||$ Millions|
|Arch Coal||ACI / ACIIQ||0||-3,016|
|Alpha||ANR / ANRZQ||1||-708|
|Peabody Energy||BTU / BTUUQ||231||-1,005|
|Cloud Peak Energy||CLD||446||-160|
|Walter Energy||WLT / WLTGQ||19||-2,842|
If you have a house worth $500,000 with a mortgage of $300,000, you have $200,000 of equity and 60% loan to value, or LTV. Similarly, if you have a $477,550 mortgage on that $500,000 house, you only have $22,450 of equity in the house. The LTV is 95.51%. This industry, worth $8.47 billion, has current losses of $8.09 billion. This $8.5 billion industry, therefore, only has $380 million in equity. That's $4.49 equity to $95.51 liabilities.
A familiar narrative -- shared by Democrats from coal states, Republicans generally, and Donald Trump on the campaign trail and after the election -- is that there is a war on coal, and this war is being waged by President Obama and angry regulators at the Environmental Protection Agency (EPA) to the applause of environmentalists who hate coal, oil and natural gas and want to trade in their gas-guzzling SUVs for a Toyota (NYSE:TM) Prius, Chevy (NYSE:GM) Bolt, Chevy Volt, Ford (NYSE:F) CMAX, Ford Fusion Energi, Nissan (OTCPK:NSANY) Leaf or Tesla (NASDAQ:TSLA), which they will charge from their personal solar array.
While some people who drive hybrids or plug-in hybrids do crow about their gas mileage, the truth is a bit more complicated:
- Electric vehicles require electricity, so people with electric cars and plug-in hybrids need more electricity, not less.
- Even if they have a solar energy system on their roof, if they charge their cars at night they will need power from the grid --again, more electricity.
- With the EIA estimating 640,000 electrics and plug-in hybrids, compared to 113.3 million gasoline vehicles for 2016, there are simply not enough electric or plug-in hybrid vehicles to make a difference.
A simpler explanation is that it's not President Obama and the EPA waging a "War on Coal," but that the regulations they put forth reflect an understanding of the environmental ramifications of burning coal and that there are viable alternatives to coal that the electric utilities are adopting.
Current data from the EIA show this to be a reasonable hypothesis:
- In 2014, utilities burned coal to generate 1.58 billion MWH, 39% of America's total electricity.
- In 2014 utilities burned natural gas to generate 1.14 billion MWH, 27.77% of the total.
- In 2015, utilities burned coal to generate 1.36 billion MWH, 33% of the total.
- In 2015, utilities burned natural gas to generate 1.34 billion MWH, 32.66% of the total.
- Coal was burned to generate 225,653 thousand MWH less in 2015 than in 2014.
- Natural gas was burned to generate 198,459 thousand MWH more in 2015 than in 2014.
These data are taken from table 5, shown below.
|Electricity Generation in the United States|
|Tech||Thousand MWH||% of total||Thousand MWH||% of total|
|Wind, other renewables||261,522||6.39%||271,885||6.65%|
|Table 5, from EIA|
While coal is and will remain important for the foreseeable future, utilities are shutting down coal plants and building natural gas and renewable energy facilities. Other data bear this out. As noted by Jack Fitzpatrick in "Morning Consult," quoting the EIA:
In 2015, 94 coal-fired power plants closed, with the combined net summer capacity of 13,556 megawatts ... roughly the same total capacity of all of Kentucky's electric sector coal plants ... Another 41 coal plants are scheduled to close in 2016, with a combined net summer capacity of 5,326.5 megawatts. That's slightly greater than all of Colorado's electric sector coal plants.
The next president can dismantle the EPA and call for a significant investment of taxpayer funds in subsidies to prop up the coal industry. He can try to reverse President Reagan's deregulation of electric utilities and set the price of electricity at a point where utilities can sell electricity from coal plants with a guaranteed return on investment. However, even if he does that, utilities will still be able to sell electricity from other sources at higher margins.
While dismantling the EPA seems like something Democrats from coal states and Republicans generally might want to do, using taxpayer monies to prop up the coal industry should be seen as an exercise in socialist intervention in the economy. Such an exercise seems likely to fail due to the "invisible hand" described by Adam Smith. The coal industry appears to be withering in the onslaught Joseph Schumpeter described as "the gale of creative destruction."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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