After years of bleeding cash and a painful string of bankruptcies, U.S. coal miners are poised to do something rare -- enjoy an earnings season.
Boosted by higher global coal prices and a more conservative approach to mining, Peabody Energy Corp. kicks off the industry’s reporting cycle Wednesday and is expected to post a third-quarter profit of $1.44 a share, based on the average of six analysts’ estimates compiled by Bloomberg. Arch Coal Inc. and Warrior Met Coal Inc. are set to follow suit with their own bullish performances.
U.S. coal production and prices for the fuel are up, though that may not be the headline as management teams present financial results this season. Instead, miners will probably say exactly what Wall Street wants to hear -- that they’re more interested in maximizing shareholder returns than seeing how many tons of coal they can dig out of the ground.
“Investor interest in the space is slowly coming back,” said Jeremy Sussman, an analyst at Clarksons Platou Securities Inc. “Check one is that management teams are returning cash to shareholders. Check two is that coal prices are holding up. Check three is whether the companies can have solid enough operational results, and by and large their results have been pretty good.’’
U.S. coal production was up 11 percent through Oct. 14 compared with the same period last year, according to the U.S. Energy Information Administration. Miners are benefiting from sustained high prices for both seaborne metallurgical coal, a steelmaking component, and thermal coal, which is burned by power plants. Global benchmarks for those commodities have stayed high, in part, because of China’s decision to curtail its own production. In the U.S., power plants have also burned more coal than last year thanks to higher prices for natural gas, a competing fuel.
Still, investors burned by coal’s collapse earlier this decade have been slow to get back in the space, said Andrew Cosgrove, an analyst at Bloomberg Intelligence. Their reluctance has come even as miners like Peabody and Arch emerged from bankruptcy with cleaned-up balance sheets and trade as some of the cheapest stocks in the sector based on their respective cash flows.
“There’s been a lack of interest from generalist investors, who are like, ‘Coal is dead,’’’ Cosgrove said. “People want some time to pass and want to see numbers on paper before they start putting their toes back in the water.’’
Coal’s long-term future is far from clear and risks abound. While much has been made of President Donald Trump’s bid to help the industry, the regulatory rollback that’s ensued was largely expected, according to Mike Dudas, an analyst at Vertical Research Partners LLC. Some policy changes will take years to show up on the balance sheet.
The sector still faces a fundamental problem -- American electricity demand has been flat at a time when gas, solar and wind power have stolen market share at power plants. It’s also unclear whether Trump-era policies – including an effort to prop up coal and nuclear power plants – will come to fruition or have any impact on long term planning at power generators, Dudas said.
But for the moment, coal investors have reason to smile. Last week, Warrior Met Coal announced plans to pay out a $600 million special cash dividend this year. The company’s stock is up more than 40 percent since it began trading in April. Peabody investors will be keen to hear Wednesday if and when the company will start its own payout, Sussman said.
“There’s been gale-force winds at this industry for years,” Dudas said. “For the first time in several years, something is going the industry’s way and luckily the industry is in a position to benefit from it financially.”