Coal: A Casualty Of War Or Creative Destruction?

by: Lawrence J. Furman


President Obama may use executive orders, the EPA, and the Clean Air Act of 1970 to further limit mercury, carbon dioxide, and other emissions from coal.

Some consider this a "War on Coal."

Rather than Obama's war, this could be "The Invisible Hand" of the marketplace or Schumpeter's Gale of Creative Destruction.

Only four of 13 U.S. coal companies are profitable.

These four companies are worth a combined $14.9 billion, constitute 75% of the $20B industry.

According to the U.S. Energy Information Administration (EIA), in 2013 roughly 39% of the electricity used in the United States was generated from coal (source). This is summarized in Table 1, below.

U.S. Electricity Generation in 2013
Coal 39
Methane 27
Nuclear 19
Hydro 7
Other Renewables 6
Other Gas 2
Data from US EIA
Table 1

According to the Carbon Brief blog's "Five graphs that tell the future story of coal," demand for coal is growing in China. The IEA, in December 2013, forecast demand for coal to grow 2.3% worldwide between 2014 and 2018. These data, coupled with the fact that the U.S. relies on coal for 39% of its electricity, suggest a bullish future for coal.

However, this 2.3% annual growth is a downward revision from 2.6% annual growth, previously forecast by the IEA. In addition, as reported Nov. 26, 2014, in The New York Times' "Obama Builds Environmental Legacy With 1970 Law," regulations issued during the Obama administration pursuant to the Clean Air Act of 1970 could:

... ultimately shut down existing coal-fired power plants, freeze construction of new coal plants and end demand for the nation's most polluting fuel.

Republicans and the coal industry have attacked the new rules as a "war on coal."

In Norway, and in Germany --

KLP, Norway's biggest pension fund manager, is divesting from coal. KLP is moving its NOK 500 million (~$75 million) from coal to renewables. KLP is also reportedly planning on moving another $75 million into renewables. According to KLP CEO Sverre Thornes:

We are divesting our interests in coal companies in order to highlight the necessity of switching from fossil fuel to renewable energy.

Norway, however, is a country of about 5 million people. While it has more people than Conneticut (with 3.6 million), it has fewer than than New Jersey (with about 8.8 million).

Germany, with close to 81 million people -- roughly one fourth the population of the United States -- is allied with Norway against coal. (See "Germany cuts coal to reach climate targets" and "Germany denies plans to close old coal plants in sprint to 2020 targets.")

If it is a war, then it's a world war, and coal may be losing. A quick look at 11 U.S. coal companies may show this $19.4 billion domestic industry to be in decline:

  • Only four of the 13 companies operate at a profit. These include Alliance Resources (NASDAQ:ARLP), Cloud Peak Energy (NYSE:CLD), Consol Energy (NYSE:CNX), and Natural Resources (NYSE:NRP).
  • Nine operate at a loss. These include Alpha Natural Resources (ANR), Arch Coal (ACI), Oxford Resources (OXF), Patriot Coal (OTCQB:PCXCQ), Peabody Energy (NYSE:BTU), Rhino Resources (NYSE:RNO), Walter Energy (NYSE:WLT), Westmorland Coal (NASDAQ:WLB) and Xinergy, Ltd (XRG). Of these, Rhino has positive return on Average Assets and positive Net Profit Margin.
  • Patriot Coal, with a market capitalization of $350,900, has filed for bankruptcy protection.

Maybe it's simply business as usual. Strong competitors win, weak competitors lose. The profitable companies include four of the largest five U.S. companies. Together they are worth $14.9 billion, constituting roughly 76.8% of the $19B U.S. coal industry.

In Table 2, I report basic financial data, including Share Price, EPS, P/E, and Market Capitalization for these 13 companies. In Table 3, I report additional financial data, including Debt to Asset, Return on Average Assets, and Net Profit Margin for these 13 companies.

Table 4, "Loss Per $100 Equity," I calculated the number of shares for a $100 investment in each of the 8 companies with negative EPS which are not currently seeking bankruptcy protection, except for Patriot Coal, which is in bankruptcy protection. I also calculated the annual losses for this lot of shares. In Table 5, I corrected for quarterly dividends, for ACI, BTU, RNO, and WLT, which pay dividends, while sustaining negative earnings per share.

Basic Financial Data
Symbol Name Price EPS P/E M Cap (NYSE:B)
1 ARLP Alliance Resource... 47.85 4.52 10.6 3.54
2 CLD Cloud Peak Energy 12.25 1.42 8.6 0.75
3 CNX Consol Energy Inc. 40.08 1.05 38.08 9.32
4 NRP Natural Resources 12.43 1.31 9.51 1.52
5 ANR Alpha Natural Resources 2.26 -5.03 0.50
6 ACI Arch Coal Inc. 2.41 -3.26 0.51
7 OXF Oxford Resource 1.1 -0.46 0.02
8 BTU Peabody Energy Co. 10.83 -2.56 2.94
9 RNO Rhino Resource Partners 2.78 -2.33 0.08
10 WLT Walter Energy, Inc. 3.25 -8.07 0.22
11 WLB Westmoreland Coal 39.96 -8.77 0.64
12 XRG Xinergy Ltd. 0.195 -0.86 0.01
13 PCXCQ Patriot Coal 0 -4.6 0.0004
As of November 26, 2014
Table 2
Additional Financial Data
Symbol Name Debt to Assets R on Avg Assets Net Profit Margin
1 ARLP Alliance Resource... 41.78 19.3 17.84
2 CLD Cloud Peak Energy 30.54 2.18 3.68
3 CNX Consol Energy Inc. 27.87 0.65 2.54
4 NRP Natural Resources 58.5 9.16 48.05
5 ANR Alpha Natural Resources 29.05 -8.95 -22.48
6 ACI Arch Coal Inc. 57.3 -7.85 -24.72
7 OXF Oxford Resource 72.78 -10.65 -6.83
8 BTU Peabody Energy Co. 42.47 -1.91 -4.08
9 RNO Rhino Resource Partners 30.13 1.67 3.39
10 WLT Walter Energy, Inc. 49.7 -6.32 -19.29
11 WLB Westmoreland Coal 35.9 -0.86 -1.2
12 XRG Xinergy Ltd. -154.92 -23.5 -202.62
13 PCXCQ Patriot Coal Corp... 9.83 -19.02 -38
As of November 26, 2014
Table 3
Losses for $100 Equity
Symbol Name Price EPS Shares per $100 Losses per $100 E
1 ANR Alpha Natural Resources 2.26 -5.03 44.25 -222.57
2 ACI Arch Coal Inc. 2.41 -3.26 41.49 -135.27
3 OXF Oxford Resource 1.1 -0.46 90.91 -41.82
4 BTU Peabody Energy Co. 10.83 -2.56 9.23 -23.64
5 RNO Rhino Resource Partners 2.78 -2.33 35.97 -83.81
6 WLT Walter Energy, Inc. 3.25 -8.07 30.77 -248.31
7 WLB Westmoreland Coal 39.96 -8.77 2.50 -21.95
8 XRG Xinergy Ltd. 0.195 -0.86 512.82 -441.03
As of November 26, 2014
Table 4
Losses for $100 Investment, factoring in dividends
Symbol Name Price EPS Dividend Shares / $100 Inv. Losses per $100 Inv.
2 ACI Arch Coal Inc. 2.41 -3.26 0.04 41.49 -133.61
4 BTU Peabody Energy Co. 10.83 -2.56 0.36 9.23 -20.31
5 RNO Rhino Resource Partners 2.78 -2.33 0.20 35.97 -76.62
6 WLT Walter Energy, Inc. 3.25 -8.07 0.04 30.77 -247.08
As of November 26, 2014
Table 5

These data, coupled with the news from Germany and Norway, suggest that any decline in the coal industry seems unlikely to be purely the result of the regulations President Obama proposed on Wednesday, Nov. 26, 2014.

However, if President Obama and the EPA are joining the Germans and Norwegians in a "War on Coal," it could be a war that has already been won.

But is it a war or is it part of what Joseph Schumpeter called the process of "Creative Destruction"? Schumpeter explained that, "the free market's ceaseless churning eliminates jobs, companies, and industries." These are generally agreed to be intrinsic components of the capitalist system.

Taking a macro view, it may be that coal is being supplanted by methane for electricity in the United States in the short term. However, elsewhere in the world, fossil fuels are being supplanted by solar, wind, geothermal, and other renewable sources. This transition will probably also eventually take place in the United States.

Maybe coal industry executives and investors should re-imagine themselves as "Energy Industry" executives and investors, and retrain coal miners and other employees to build hydro turbines, wind turbines, solar modules, batteries, or other widgets of the renewable energy era.

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.

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