Arch Coal, Alpha Natural lag coal industry in dire straits, Credit Suisse says

• Credit Suisse analysts find little reason to favor coal equities amid a "dire outlook" for the group, initiating Arch Coal (ACI -12.2%) and Alpha Natural Resources (ANR -12.3%) with Underperform ratings and $0.50 share price targets, and Peabody Energy (BTU -5.8%) with a Neutral view and $4.50 target.
• ANR suffers the greatest liquidity risk, the firm says, as negative free cash flow and upcoming debt maturities eat into its existing liquidity position, while ACI fares somewhat better but still is likely to burn through cash for the next several quarters; both companies are limited in their ability to borrow more debt and both face revolver maturities in mid-2016.
• Cloud Peak Energy (CLD -0.9%) - the coal stock “least likely to cause sleepless nights” - is started with an Outperform rating and $11 price target.
• Adding to ACI's woes are Friday's news that the company is in talks with restructuring advisers as it looks to reduce its debt, and the receipt of delisting notice from the NYSE.
• KOL -2.4%.

Comments

[Charbon, C'est L'Enfer]

ANR and ACI have been savagely beaten in the last couple weeks. Two weeks ago they were trading at double WLT's share price, and now they are all about the same level. I am much more familiar with WLT's capital structure, but I will be looking into ANR and ACI. For those who want to keep a long-term leveraged punt on coal, it seems there is no reason to stay in WLT (which has near-term BK risk) when ANR or ACI can be had for nearly the same price.

[alphaodyssean]

I have tracked production and cost info for natural gas (shale BS bubble) for 7 years now and continue to maintain the COST of an mcf of shale gas is over $8. this gummit turkey is flapping its wings hard to come to roost soon.

[mr jobs]

The price of natural gas can move up very very quickly. We are currently in an environment where nat gas is dirt cheap. If this were to change as we have seen happen before due to an event such as weather, supply/demand etc. then it will be interesting to see

[mr jobs]

If an issuing company gets bought out there is no covenant restricting the company making the acquisition from buying the deeply discounted debt of the company it acquires.

[brigantine partners]

Texas switched from 38% to 22% coal in the last year as ng prices fell below $3. above comment edited out. sorry, I am typing on my phone.

[brigantine partners]

I don't believe that Nat gas prices are fixed for most of utilities. just look at Texas switching from 38% coal to over the last year. the switch to ng May create fatter profits for the utilities, since regs prevent rapid pass through costs but not force pass through savings.

however, if ccs regs get taken out of epa guidelines, as now seems likely, and ng strip pricing rises as production slows, then the shift back to coal as a domestic energy source may be more rapid than people realize. if so, aci securities may be quite cheap.

binds especially, since the idea of a anr/aci merger has some merit, and bonds are likely to be paid back and reissued with cost savings from the merger.

a lot of moving pieces to be sure, but riskreward favors aci down here. bonds and stocks are options with more time value than people realize

[mr jobs]

With the way a lot of the bonds are trading for companies in the coal industry it is safe to say that the debt of these companies will be available for pennies on the dollar. You seem to be making the false assumption that companies who choose to acquire a coal company are responsible for paying debt back in full. However in a market like this a bond offering that originally raised a billion dollars can be repurchased for half of that. So if a company issued bonds to make acquisitions those acquisitions are now complete. The debt burden that needs to be repaid has a market value of pennies on the dollar. A company looking to make acquisitions can buy up most of the bond debt dirt cheap and still buy the issuing company.

[briian865]

just to put a finer point on it - ANR's 3.875% (2017) traded at $22 today, the 9.75% (2018) traded at $23, the 6.25% (2021) traded at $14.5 and the 6% of 2019 traded at $15. All of these are down at least $10 from levels just three weeks ago. Even assuming a 15% premium to today's price levels, ANR could eliminate $1.5 bln of debt for approx. $350 million.

[Omer Altay]

no they can't. There's no liquidity for them to do that.

[briian865]

ANR ended the quarter with $1.05 Bln of cash and marketable securities. As I said if they could monetize $250 mil of NG assets that would give them enough liquidity to use approx. $350 mil of cash to repurchase debt. If you don't agree then please explain why they wouldn't have enough liquidity to do that. Also seems that people forget that if you retire $1 Bln of debt you'll save approx. $65 mil in interest expense.

[mr jobs]

President Obama will announced his plan to increase everyone’s power bill. Or, as he puts it, “a national plan to reduce carbon pollution, prepare our country for the impacts of climate change and lead global efforts to fight it.”

If you accept the science of global warming, then you accept the fact that the president’s unilateral action on climate change will have absolutely no effect in terms of adjusting the global thermostat to a temperature Obama finds desirable. The rest of the developing world, anchored by India and China, are building carbon-burning factories, power plants and even whole new cities that will overwhelm any new rules the president may impose on Americans and our struggling economy.

[Jerry Skocik]

I want to know why my Electric Bills and Gas Bills have not gone down. Cheap Coal
Cheap Natural Gas. for almost a year and I am still paying the same for my utilities.
Some one explain.

[Biological]

Increased renewables. Ask the Germans.

[Matthew Lewis]

It's also likely your electric company locked in prices for natural gas and other fuel a long time ago. Additionally costs like pipeline transport fees are locked in for 10-20 years.

[alphaodyssean]

they're going up, way up. NG is underpriced and your stellar annointed vision of YOUR government is shutting down coal fired electricity to......save the planet. ... can't fux any thing else, but let's all sacrifice to.....save the planet. :)

[mr jobs]

Perhaps after all is said and done Peabody is the last man standing. I am thinking we see consolidation in the coal industry. Good assets will be available cheap. The industry will shrink the few left standing will be big fish in a small pond. Peabody could actually benefit though it will take several months to unfold

[chuck lewis]

Editor The Lewis Letter
BTU will be the last man standing.
New CEO will light up the candles and
make canaries tweet.

[WintonCapPartners]

Their 2018 bond looks pretty sweet IMO. 15.5% YTM

[fitzman96]

The only direct exposure I have to coal is arlp I have some indirect unp Csx NSC but trains aren't going anywhere they're long term hold.. The coal industry really shot itself in the foot as you said and I'm afraid bankruptcy is there only chance unless a republican president gets in and doesn't make it one of missions to destroy coal.. NG will be a failure I'm not bashing it I own a LNG shipper but the numbers don't add up in the end where it can replace coal

[fitzman96]

NG assets? Can you elaborate plz?

[WintonCapPartners]

BTU has a ton of CF freeing up in the next 18mths that will really help them and they are breakeven on a CF basis right now. ACI has a lot of cash and IMO needs to start buying debt in open mkt with so much trading at 20c. That they are dealing with 2020 holders makes me think their 2019 maturities will be ok. Every $1 in cost savings adds $30M in FCF. Leer mine is doing great. ANR's neg CF will likely lead to liquidation vs restructure. Coal still most used in US and imports, esp to India, looking to grow. Ultimately I think ACI survives, but it will be close.

[nemonemo]

You didnt talk about 1B+ NG assets ANR has

[Keylime99]

AxiosCap, I think you need to rethink your view on ANR, they have recently repurchased several million worth of bonds, they have considerable Nat Gas assets that are undeveloped, they own shares of Rice a Nat Gas company. Using cash & Nat Gas assets, ANR could all but retire their debt at these discount bond prices. They will most likely do a reverse stock split & sell new stock to raise operating capital. This type of move would keep them out of bankruptcy, as the coal market recovers, the EPS will recover as will the stock PPS. In that scenario I think ANR is in better shape than ACI.

[J Mintzmyer]

I'd like to see both Arch Coal and Alpha Natural merge, issue a massive tranche of senior 8-9% December 2021 notes, and repurchase the majority of the current debt under negotiated transactions for 25-40c on the $.

Could be a long-term winner and everyone is happy- 'cept for the 40% of managers and sales who get laid off...

[Bentley 2]

Amen well said

[Matthew Lewis]

The entire industry is a mess. ACI, ANR, BTU, and WLT took on an ungodly amount of debt in 2011 with some of the worst timed (peak cycle) acquisitions in history. Now the industry can't consolidate because no one is willing or able to take on these company's debt. So we get 4 zombie companies that continue to operate and not meaningfully cut production. The industry needs several of them to be liquidated to recover, in my opinion.

CLD and ARLP are worth a shot if you want to go long.

[Senna2002]

ARLP has a solid 20-25% downside once they cut the current unsustainable distribution. NRP did the same. This sector is a complete disaster that not even people on the inside have ever seen nor have any clue where and when is the bottom. Just take a look at the Robertson's trying to catch a falling knife the past 2 years buying and buying their own shares only to see it go lower. And with the current Obama administration hell bent on ending the coal industry, coupled with these bankrupt zombie companies that still keep operating the recovery may take many years to come...