Running With The Bulls Of Coal: Part II

by: J. Sheehan

This article is part II of the two-part article regarding the reasons on why to be bullish about coal.

In Part I, I focused on the macroeconomic facts on coal and why one should be bullish on coal over natural gas - both short and long term. If you missed it, or forgot, here are the main highlights:

  • Increased EU/Asia production/consumption for 2012 and onwards
  • Increasing NG prices
  • EIA 's forecast for U.S. coal consumption/production increased across the board from this month to last - See the EIA's "Short-Term Energy Outlook" (STEO) report for August, 2012)

And in case you didn't get enough fun facts on coal, here's one more I stumbled upon:

  • According to the EIA, in 2011, Wyoming produced 438 million short tons of coal - 40 percent of the coal mined in the United States.

In Part II, I will be narrowing my focus to four individual U.S. coal companies that I particularly like to trade: Alliance Resource Partners (ARLP), Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU). Depending on your style of investing, there are some other good plays in coal, such as James River Coal (JRCC), CONSOL Energy (NYSE:CNX), Walter Energy (NYSE:WLT) and Cloud Peak Energy (NYSE:CLD), but I have not followed those companies as closely as I have with ACI, ANR, ARLP and BTU.

Following my analysis of ACI, ANR, ARLP, and BTU, I have listed out some important events that are set to take place in the next two months that I believe could significantly impact coal, as well as stocks in general.

With Q2 earnings results behind us, it appears as if most of the bad news is out in the open now. The EIA's STEO report shows a quicker-than-expected recovery, while the price of natural gas continues to rise and correct itself. My guess is some of the coal stocks should begin to rebound and find more stability in the next few months, assuming the EU doesn't implode and there isn't a global recession.

Alliance Resource Partners LP

At first, I wasn't going to include ARLP because it is a Master Limited Partnership ((NYSE:MLP)), but since my goal is to present different opportunities for different types of investors and styles, it should absolutely be included.

ARLP is truly the "diamond" in the rough. Most coal companies are plagued with massive amounts debt, but ARLP actually has more equity than debt. And despite the low price of coal and its struggling peers, ARLP reported a record quarterly revenue, sales volume and EBITDA for Q2.

CEO Joseph Craft stated the company's "operating strength, quality customer relationships and solid contract position allowed us to overcome challenging market conditions and deliver another quarter of excellent results to our unitholders."

Additionally, ARLP also announced an increase in distributions to "unitholders" for the quarter to $1.0625 - a 3.7 percent increase from the previous quarter and a 15.2 percent increase from the 2011 quarter. ARLP has increased its distributions for 17 consecutive quarters.

ARLP has been my best performing long position in coal and is likely to be the best overall coal pick. ARLP has been largely untouched by the ups and downs of coal in the last few months, showing stability, with a tremendous upside. In addition, the 7 percent distribution makes it an easy choice over its competitors because while coal may go up down sideways and more, you can always count on that quarterly distribution. ARLP's only downside: It doesn't have as much of an upside compared to ACI, ANR and BTU. If you are skeptical about coal, but want to make some sort of entry, ARLP is your best bet.

For more detailed information on ARLP's staggering growth, check out this recent article, written by SA contributor Peter Epstein.

(Click to enlarge)

The chart above shows the last 20 days of trading with a two-hour frequency. The numbers and arrows mark technical events and match up with the respective numbers below.

  • Technical moves: 8 Bullish; 4 Bearish
    • 12. Aug 9: Commodity Channel Index - Short-term Bullish @ $63.03
    • 11. Aug 6: Slow Stochastic - Short-term Bearish @ $61.04
    • 10. Aug 6: Short-term KST - Short-term Bullish @ $61.04
    • 9. Aug 3: Prices crosses moving avg (21 week) Int.-term bullish @ $60.38
    • 8. Aug 3: Fast Stochastic - Short-term Bearish @ $60.38
    • 7. Aug 3: Commodity channel Index - Short-term bullish @ $60.38
    • 6. Aug 2: Engulfing line (bearish) - Short-term Bearish @ $61.93
    • 5. Aug 2: Inside bar (bearish) - Short-term Bearish @ $61.93
    • 4. Jul 31: MACD - Short-term Bullish @ $61.24
    • 3. Jul 27: Price crosses moving avg. (50-day) - Int.-term Bullish @ $58.82
    • 2. Jul 27: Momentum - Short-term Bullish @ $58.82
    • 1. Jul 27: Intermediate-term KST - Int.-term Bullish @ $58.82

ARLP is on upwards trend following a recent upgrade and strong earnings. In the past three weeks there have been three intermediate term bullish events indicating a continuing upwards trend.

ARLP is a long-term hold for me. I have not messed around with options nor tried to make any short-term moves. I think a solid entry price is in the $58 neighborhood, but I would personally consider increasing my position if shares dropped below $60. The 12-month median target is $76, with a mean of $75.

Alpha Natural Resources, Inc.

ANR is the largest U.S. producer and exporter of coking coal and has the largest export capacity. What I like most about ANR is its value. The upside to ANR is by far the greatest among the +$1.0 billion cap coal companies. Currently, ANR is trading at less than one-third of the book value - off over 65 percent from it's 52-week high of $35.15.

What I don't like: ANR's -10 percent profit margin. Additionally, a negative return on equity, and EPS has dropped 100 percent quarter-over-quarter. ANR was the S&P 500's biggest decliner, which could be looked at one of two ways: it's bottomed and is poised to rebound, or more gloomy days ahead. I believe the former is more likely than latter.

It is also important to note in Q2, ANR reported a loss of $2.2 billion, or $10.14 per share, though this was largely attributed to one-time costs like goodwill and asset impairment. Excluding restructuring and impairment costs, the adjusted loss was $72 million, or 33 cents per share.
(Click to enlarge)

The chart above shows the last 20 days of trading with a two-hour frequency. The numbers and arrows mark technical events and match up with the respective numbers below.

  • Technical moves: 5 Bullish; 1 Bearish
    • 6. Aug 13: Momentum - Short-term Bearish @ $7.12
    • 5. Aug 10: Commodity Channel Index - Short-term Bullish @ $7.35
    • 4. Aug 9: Head and shoulder bottom - Int.-term Bullish @$7.25
    • 3. Aug 9: Price crosses Moving average (21 day) Short-term Bullish @ $7.25
    • 2. Aug 3: MACD - Int.-term Bullish @ $6.89
    • 1. Aug 2: Short term KST - Short-term Bullish @ $6.66

ANR moves similarly to ACI. I initiated a long position just over a month ago at $6.56, and just started trading ANR options a few weeks ago, but so far I have done quite well.

I think establishing a position below $6.75 would be ideal, though anything below $7.00 allows for substantial upside, as long as you are looking to hold at least six months. The 12 month estimates for ANR are pretty amazing - a mean of $13.01, median of $12.00, and a high of $28.00, but like the rest of these estimates, a forecast is only as good as a forecaster, and nothing is definite, so it is best to take all forecasts with a grain of salt. If anything, use the estimates as a reference point. That being said, analysts see ANR making significant climbs over the next year.

Arch Coal Inc.

ACI has two problems: debt and profitability. The long-term debt-to-equity is 143 percent, and 146 percent total to equity, which is extra concerning considering it has reported a loss for the last two quarters, and is expected to report a loss for the next two quarters.

On the positive side, ACI has been taking drastic measures to cut costs. In June, the company announced it would be shutting down three of its higher-cost mines, and with that, 750 employees - roughly one tenth of its labor force. By reducing costs, ACI was able to beat Q2 earnings estimates and was recently upgraded. ACI also has a partnership with Kinder Morgan (NYSE:KMI) to expand its exporting capacity.

(Click to enlarge)

The chart above shows the last 20 days of trading with a two-hour frequency. The numbers and arrows mark technical events and match up with the respective numbers below.

  • Technical moves: 11 Bullish; 4 Bearish
    • 15. Aug 13: Engulfing Line (bearish) Short-term Bearish @ $7.22
    • 14. Aug 13: Commodity Channel Index - Short-term Bullish @ $7.22
    • 13. Aug 10: Engulfing Line (bullish) Intermediate-term Bullish @ $7.46
    • 12. Aug 10: Momentum - Short-term bullish @ $7.46
    • 11. Aug 9: Pennant (Bullish) Short-term Bullish @ $7.42
    • 10. Aug 9: Commodity Channel Index - Short term Bullish @ $7.42
    • 9. Aug 8: Double Moving Avg Crossover (21/50 day) Short-term Bullish @ $6.93
    • 8. Aug 3: Slow Stochastic - Short-term Bearish @ $6.72
    • 7. Aug 2: Fast Stochastic - Short-term Bearish @ $6.48
    • 6. Aug 1: Engulfing Line (Bearish) - Short-term Bearish @ $6.98
    • 5. Jul 31: Short-term KST - Short-term Bullish @ $7.21
    • 4. Jul 27: Price crosses moving avg (50 day) - Int.-term Bullish @ $6.80
    • 3. Jul 27: Price crosses moving avg (21 day) - Short-term Bullish @ $6.80
    • 2. Jul 27: Relative Strength Index (RSI) - Int.-term Bullish @ $6.80
    • 1. Jul 27: MACD - Short-term Bullish @ $6.80

In my experience, ACI seems to move in five to seven day cycles - making significant gains over the course of three to four days, followed by two to three days of losses. At then end of this cycle, the gains and losses cancel each other out for the most part. ACI is my favorite option play. I have become very familiar with its movement and behavior, and as a result, I've done pretty well.

I got into ACI way back in April and chased those 52-week lows to the point where I ended with a shameful cost-basis of $7.96. But, I am not in the least bit concerned. I am in no rush to sell, and will continue to play the options. Patience is the name of the game, and even though my cost-basis is high, I have no fear that a year from now, things will be very, very different than they are now.

Overall, I wouldn't recommend establishing a long position unless you can get in at a really low price. I think ANR is a better choice as it carries similar risk, but has much more of an upside. Analysts have estimated a 12 month mean target of $9.93, with a median of $10.00.

Peabody Energy Corp.

Peabody Energy is the world's largest private sector coal company and has a $6.16B market cap. The company owns interests in 30 coal mining operations in the U.S. and Australia, and also owns a joint venture interest in a Venezuelan mine. BTU's superior resources, capabilities, and geographical diversification make it a favorite among analysts.

BTU's Australian operations provide a significant advantage because it allows them to ship coal to Asia quicker and cheaper. This advantage has also provided some cushion against the soft market in the U.S. and helped BTU remain profitable. However, fellow SA contributor JJ Butler noted in a recent article that BTU's Australian operations are not as advantageous as they seem. In addition to "structural problems", these operations saw profit margins plummet more than 50 percent. But the biggest problem he notes is Australia's new carbon tax, which went into effect in July.

One other thing to be aware of is BTU's debt-to-equity ratio, which is 109 percent, following the $5B acquisition of Macarthur Coal. As long as BTU can continue to meet margins, the debt-to-equity shouldn't be that big of a deal.

Other than that, BTU has solid financials, and is among the best in the industry - ROE is 17 percent, operating margin is 17.8 percent, consistent and stable revenue, and high liquidity.

Additionally, BTU has made the most progress in expanding its exporting capacity. On July 17, 2012, BTU reached an agreement with Kinder Morgan to expand exporting terminals on the Gulf Coast. The planned expansion will more than double BTU's export capacity along the Gulf Coast between 2014 and 2020.

(Click to enlarge)

The chart above shows the last 20 days of trading with a two-hour frequency. The numbers and arrows mark technical events and match up with the respective numbers below.

  • Technical moves: 9 Bullish; 1 Bearish
    • 10.) Aug 10: Momentum - Short-term Bullish @ $23.23
    • 9.) Aug 10: Fast Stochastic - Short-term Bullish @ $23.23
    • 8.) Aug 10: Commodity Channel Index - Short-term Bullish @ $23.23
    • 7.) Aug 9: Price crosses moving avg (50 day) - Int. term Bullish @ $23.01
    • 6.) Aug 9: Short Term KST - Short term Bullish @ $23.01
    • 5.) Aug 7: Momentum - Short-term Bullish @ $21.84
    • 4.) Aug 7: Price crosses moving Avg. (21 day) Short-term Bullish @ $21.84
    • 3.) Aug 6: MACD - Short term bullish @ $21.54
    • 2.) Aug 3: Williams %R - Short-term bullish @ $21.29
    • 1.) Jul 27: Commodity Channel Index - Short term Bearish @ $20.80

Since BTU hit its 52-week low following Q2 earnings results, BTU has been making steady gains and volatility has decreased, showing some signs of stability. BTU has been making steady gains. Additionally, of the last 10 technical events, nine of have bullish, and appears be establishing an upward trend.

I initially bought shares in the beginning of May at $30.55, but recently doubled-down at $20.40. Though I only intended on trading BTU long-term, I did buy some September 21 and may consider more intermediate-term option trades if the price is right.

I feel BTU has likely seen its bottom, and the sub twenty days are behind us. That being said, a solid entry price for BTU is around $21.00. There is a chance you might get to get in around $20, but I think that is a long shot.

Analysts have estimated a 12-month mean target of $32.75, with a median of $32.00.

Upcoming Events:

The next month and a half will be very interesting for coal, and stocks in general. I have put together a calendar marking some of the more important dates with the respective meetings and reports, and why they are important.

August data reports continue to be mixed - economic indicators showing and confirming a slow down in economic in the U.S., China, and Europe. All eyes are on global central banks for further monetary policy initiatives and, in essence, place puts underneath the market. Everything the Fed does either supports or fills in the blanks of what other central banks are not doing.

On August 31, the Fed's annual symposium in Jackson Hole will serve as the ultimate meeting of monetary policy, providing a grand stage for Bernanke to telegraph the level of satisfaction he may or may not have with the policy efforts of ECB and PBOC. It will also allow him to indicate his intentions for the upcoming September 13 FOMC meeting, which will be the Fed's last chance to enact further easing prior to the presidential election.

Based on whatever actions global central banks may or may not take, the Jackson Hole Symposium will provide the framework by which investors can model or anchor their portfolios. Investors seem to think it will result in either an "it's too late and not enough" or "just enough" to be a market catalyst.

Regardless, the next month and a half is filled with tons of reports that could send coal stocks soaring, so it could be a good opportunity to make some quick gains and really dig deep for those lows. Here are some of the scheduled economic reports/events that are noteworthy and could impact coal:

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August, 2012

  • Aug 14 - 8:30 a.m. EST: Retail Sales - Jul
    • June reports were very disappointing all around, suggesting clear signs of spending caution on the part of consumers who have been "unnerved by the macro headlines" - softening labor market
  • Aug 14 - 8:30 a.m. EST: PPI - Jul
    • Energy prices fell .9% in June - the smallest monthly decline since prices began to fall in March. July is a higher consumption month and with increasing NG and coal prices, a positive report might be a nice little boost.
  • Aug 16 - 10:00 a.m. EST: "Philly Fed"
    • This is the most important of manufacturing reports. The Philly Fed contracted by 12.9 in July, 16.6 in June, and 5.8 in May. Historically, there has been a pretty high correlation between the GDP and the Philly Fed report. This report is also a general reflection of the market. If results are positive for Philly Fed in August, the market should go up.
  • Aug 22 - 2:00 p.m. EST: FOMC Minutes
    • Minutes from the July 31-August 1 meeting
  • Aug 28 - 10:00 a.m. EST: Consumer Confidence - Aug
    • The market is very sensitive to this report, and tends to overact, so with coal's high volatility it might feel some ripple effects, even though the coal sector is largely unrelated. Note: Confidence/sentiment does not correlate strongly with spending, so it is not a good predictor. Sentiment reflects things like unemployment, gas prices and future spending
  • Aug 29 - 8:30 a.m. EST: GDP - 2nd Estimate - Q2
  • Aug 29 - 8:30 a.m. EST: GDP Deflator- 2nd Estimate - Q2
  • Aug 29 - 2:00 p.m. EST: FOMC - Beige Book
    • Commentary on current conditions in the 12 Fed districts. Could give some hints as to what the FOMC might be planning for Sept. FOMC
  • Aug 31 - FOMC Jackson Hole Annual Symposium
    • Meeting with IMF's Christine Lagarde, and BOE's Adam Posen. Gives opportunity to Bernanke to layout his plans/intentions at the Sept. FOMC meeting.

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September, 2012:

  • Sept - (TBA) PBOC Meeting (usually first week of September)
    • Opportunity for China to enact monetary policies. China's CPI report on Aug. 6 indicates that easing may be in order. CPI is a major gauge of inflation and is estimated to grow by 1.7 percent Y-o-Y in July, slower than the 2.2 percent seen in June. One possible action is for China to lower interest rates, which would be great for coal stocks.
  • Sept 6 - Governing Council meeting of the ECB in Frankfurt
    • Look for ECB to announce forms of easing
  • Sept 10 - 3:00 p.m. EST: Consumer Credit - Jul
    • Expected to increase. Consumer credit is fully in an expansion phase as banks willingness to lend has eased over the last few months
  • Sept 11 - 8:30 a.m. EST: Trade Balance- Jul
    • Strong dollar, weakness in EU and the Asian slowdown will all lead to softer export growth in the near term.
  • Sept 11 - 10:00 a.m. EST: EIA Short-term Energy Outlook - September
    • The big one: Look for decrease in stockpiles; hopefully around 175M tons would be awesome (last week at 200M tons) Consumption/production for NG and coal, along with inventories/stockpiles/prices/forecasts.
  • Sept 13 - FOMC Meeting
    • Last chance for Bernanke to introduce easing before the election.
  • Sept 20 - Governing Council & General Council meeting of the ECB in Frankfurt

With over a dozen significant meetings and reports to be released, the next two months are going to be very exciting. Each one of these events could result in dramatic fluctuation of coal stocks in the underlying trading day. Pay close attention to trading on these days - you just might get the opportunity to lock in a bargain long position or make a quick buck off of a swing trade.


In conclusion, coal is here to stay, and though there may be some declines in the short term, I think coal will begin to strengthen and show signs of stability in the next few months, especially as natural gas approaches $4, and if the upcoming economic reports are positive.

ARLP, ANR, ACI, and BTU, are my favorite coal stocks to trade, but I play them each differently. Each company appeals to a different style of investing. ACI and ANR offer lots of short term investing opportunities - playing the daily and swing fluctuations could result in high rewards, especially with options. They are also good long-term plays, ANR being the more lucrative of the two in my opinion, but they also carry the most risk.

BTU and ARLP on the other hand are much more long-term investing oriented - fluctuating less, and presenting more stable, predictable growth.

The next two months are jam-packed with important economic events that could play a huge role in terms of market behavior, most notably, the central bank meetings in September. The People's Bank of China will be meeting sometime in the first part of September, followed by the European Central Bank meeting on September 6. The results of these meetings will largely dictate the outcome of the FOMC meeting on September 13, and whether or not another round of easing will be in order for the U.S.

Disclosure: I am long ACI, ANR, ARLP, BTU.