Arch Coal (ARCH +3.9%) is initiated with a Buy rating, while Cloud Peak Energy (CLD +0.6%) and Alliance Resource Partners (ARLP -1.5%) are started at Neutral at MKM Partners, which says coal mining "restructuring [is] ending at just the right time."
MKM believes the recent run-up in global metallurgical and steam coal prices is coinciding nicely with the bankruptcy emergence of major U.S. producers, and that clean balance sheets can thrive even when commodity prices normalize.
The firm says it is particularly bullish on longer-term coking coal market fundamentals, which is why it favors ARCH over CLD.
Coal stocks (KOL +2.5%) are surging, as Trump's election sparks hope that his administration can reverse the fuel’s long decline in the U.S.
But analysts say the main culprit for coal’s decline is natural gas, which has flooded the market since the rise of fracking, which seems unlikely to change, as Trump also has promised to liberalize fracking; “cheap natural gas will continue to threaten the coal industry," says Andrew Moore of Platts Coal Trader.
Analysts say it remains unclear whether Trump’s election is a signal to buy coal stocks, but at the least, “this is a sign that coal isn’t going away," Moore says.
Alliance Resource Partners (ARLP +2.6) powers to a 52-week high after easily beating Q3 earnings estimates and raising 2016 revenue guidance above consensus.
Q3 revenues slipped 2.5% Y/Y to $552M but rose 25.7% Q/Q, helping drive net income higher by 8.6% and EBITDA up 5.2% Q/Q.
ARLP raises FY 2016 revenue estimates to $1.88B-$1.92B from earlier guidance of $1.82-$1.91B and above $1.84 analyst consensus estimate.
ARLP sees 2016 coal production of 34.5M-35.5M tons, coal sales volumes of 36.5M-37M tons, and average coal sales price/ton to 5%-6% below 2015 average realizations.
Looking to 2017 and beyond, the company anticipates a recovery in domestic thermal coal markets as higher natural gas prices prompt increased demand for coal and supply is reduced by increased shipments of U.S. coal into the export markets.
The bad news coming from Peabody Energy and other coal companies could damage Joy Global (JOY -0.3%), as Axiom Capital analyst Gordon Johnson notes that 59% of JOY's 2015 revenues came from the sale of equipment to coal miners globally.
"Along these lines, we feel the announcement by BTU today could have incrementally negative implications for JOY’s ability to achieve its FY 2016 guidance,” Johnson writes.
According to Johnson, JOY’s OEM revenues historically have an 87% correlation to the mining capex of the big five U.S. coal miners: Peabody (BTU -43.6%), Arch Coal (ACI -3.4%), Consol Energy (CNX -1.4%), Alliance Resource Partners (ARLP -0.1%) and Cliff Natural Resources (CLF -8.4%).
Coal stocks open with strong gains after yesterday's decision by the U.S. Supreme Court to block proposed regulations of coal fired power plants, likely pushing out a potential hearing after the presidential election: BTU +12.7%, CLD +19.7%, CNX +2.2%, CNXC +5.2%.
The court’s order is temporary and is not a ruling on the merits, but it indicates the court’s conservative majority has misgivings about the emissions plan, and signals the rules could run into trouble in the courts, which could hurt the Obama administration’s ability to follow through on U.S. commitments in the Paris climate deal.
FBR Capital says that while it does not foresee any near-term change to its outlook for coal companies, the delay could improve the long-term perception toward coal producers in maintaining meaningful market share as a fuel for domestic electricity generation (Briefing.com).
FBR believes Westmoreland Coal (WLB -4.4%) and Alliance Resource Partners (ARLP -1.4%) could receive the most sustainable valuation benefit and investor interest following the Supreme Court action.