Both thermal and met coal stocks have posted record gains year to date. Peabody (BTU) is up ~200% this year, while Alpha Met (AMR) has rallied ~150% and CONSOL (CEIX) posted 110% gains ahead of Q1 results. Given wild swings in seaborne and in-basin coal pricing, there are likely to be a few key drivers of share price performance throughout the earnings season:
- Production outlooks - The Department of energy is estimating that thermal coal production in the US will rise by 7.4% in 2022; meanwhile the nation's largest producer is forecasting ~4.0% production growth -- to the extent producers are able to guide production above prior forecasts, shares should trade higher.
- Spot volumes - the majority of US thermal coal is contracted for 2022; however, spot seaborne and in-basin pricing has risen by multiples of prevailing contract prices; anyone able to increase spot sales guidance, whether from inventories or outproducing production guidance, could outperform well.
- Seaborne tons - even with in-basin spot pricing more than doubling, the seaborne thermal coal market is priced at a steep premium to the domestic market; in the Western US, Union Pacific (UNP) and BNSF saw accelerating coal shipments in Q1, and in the east the Hampton Roads export terminal volumes hit a 3-year high in February.
- Production mix - seaborne met coal generated $105/t of EBITDA for Peabody (BTU) during Q4, while PRB thermal generated $1/t of EBITDA; with seaborne coking coal hovering around $500/t, even slight increases in the mix of met coal could surprise the Street (HCC).
- Contracting - contract priced volumes account for upwards of 90% of production for most US thermal coal producers; contract prices are impacted by a number of factors, with natural gas alternative and in-basin spot prices most among them; in-basin coal prices in Illinois (for example) have more than tripled in 2022, so any commentary on improved contract pricing for 2023 could lift share prices.
In a world that is increasingly short energy, coal stands out as a beneficiary of current, elevated energy prices. With many coal stocks trading ~2-3x earnings, the focus remains on maximizing profits in the current environment. Those companies that can show improved export volumes, higher contract pricing or increased production volumes should perform well throughout the earnings season.