Coal Industry Near-Term Outlook Dulled by Falling Demand

January 22, 2020, 6:58 pm | Admin

The Zacks Coal industry comprises companies that are involved in the discovery and mining of coal. Depending on the deposit, coal is mined by either opencast or underground method. Coal is valued for its energy content and used worldwide to generate electricity, and in steel and cement manufacturing.

However, the importance of coal and the coal industry has declined in the United States over the past few years, with natural gas and renewable sources creating more downside pressure.

Let’s take a look at the industry’s three major themes:

  • U.S. coal companies are continuously losing ground, as natural gas and renewable energy are being preferred over coal for energy needs. The shift in loyalty is primarily due to concerns about increase in emission and the effects of pollution on human growth and development. Availability of cheap shale gas in the United States, technological advancement and incentives on usage of renewable energy continue to cut down the popularity of coal as a source of energy. The latest report from U.S. Energy Information Administration (“EIA”) forecasts 2020 coal consumption in the United States to fall to 531 million short tons (MMst), indicating an 11% decline from the 2019 levels of 596 MMst. Coal consumption is estimated to further drop to 513 MMst in 2021.
  • Amid declining domestic consumption, coal exports have been aiding U.S. miners to gain some lost ground. Despite stable coal shipment to India, Japan and South Korea, EIA estimates overall U.S. coal exports to drop by 11% year over year in 2020 to 83 MMst. Higher usage of cheap natural gas supplied from Russia is expected to lead to the decline in usage of coal in European countries. In addition, rising coal exports from Indonesia and Australia, and proximity to Southeast Asian countries (high coal demand zone) are hurting U.S. shipments.
  • The Trump administration clearly has a pro-coal stance, with the Environmental Protection Agency coming up with an Affordable Clean Energy proposal to replace the stringent Clean Power Plan. Trump also decided to exit the Paris Climate Agreement to promote usage of coal and revive the industry. Employment in the coal industry remained steady in the last two years. However, the ongoing decline in coal exports and domestic consumption will adversely impact the prospects of coal companies operating in the United States.

Zacks Industry Rank Indicates Weak Prospects

The Zacks Coal industry is a 14 stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #214, which places it at the bottom 16% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 16% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since March 2019, the industry’s earnings estimate for the current year has gone down by nearly 320%.

Before we present a few coal stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Coal industry has underperformed the Zacks S&P 500 composite and the Zacks Oil and Gas sector over the last 12 months.

The stocks in the coal industry have collectively declined 47.3% compared with the Zacks Oil-Energy sector’s decrease of 7.7%. In contrast, the Zacks S&P 500 composite has gained 23.8%.

Coal Industry’s Current Valuation

Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.

The industry is currently trading at trailing 12-month EV/EBITDA of 4.21X compared with the Zacks S&P 500 composite’s 12.38X and the sector’s 5.03X.

Over the past five years, the industry has traded as high as 6.08X, as low as 2.88X and at the median of 4.21X.

To Sum Up

Coal companies continue to face hardship and have already seen their share of difficulties, with dropping demand, rising competition from other energy sources and increasing emission awareness over the past few years. At present, higher volumes of coal are produced from mines with minimum human intervention, which can have a negative impact on job growth in the industry.

The change in policy by the current U.S. administration is assisting coal-fired plants and creating demand for the commodity but the expected drop in U.S. coal exports is likely to create more challenges for the industry. Amid such difficulties, coal companies are trying to reduce operating costs, idle high cost mines, produce more low cost mines and enter into collaborations to remain competitive.

At present, among the coal stocks under our coverage, only Yanzhou Coal Mining Company Limited (YZCAY) and Hallador Energy Company (HNRG) hold a Zacks Rank #2 (Buy), while most of the others carry a Zacks Rank#3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy)stocks here.

Zoucheng, China-based Yanzhou Coal Mining Company Limited has lost 2.3% in the last 12 months and currently has a dividend yield is 7.85%. The Zacks Consensus Estimate for 2020 has moved up by 34.5% to $2.49 in the last 90 days.

Denver, CO-based Hallador Energy Company has lost 53.2% in the last 12 months and its current dividend yield is 6.4%. The Zacks Consensus Estimate for 2020 has moved up by 46.7% to 22 cents in the last 90 days.

Brookwood, AL-based Warrior Met Coal (HCC) currently carries a Zacks Rank #3 and has lost 13.55% in the last 12 months. The Zacks Consensus Estimate for 2020 has moved up by 9.2% to $3.56 in the last 60 days.

Canonsburg, PA-based CONSOL Energy Inc. (CEIX) currently has a Zacks Rank#3 and has lost 23.3% in the last three months. The Zacks Consensus Estimate for 2020 has moved up by 17.2% to $2.59 in last 60 days.

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Last modified on January 22, 2020, 6:59 pm | 321