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A time to consolidate?

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World Coal,

Mark Robinson.

Recent media reports have painted a dismal picture of the US coal industry. For the last several years, coal consumption has dropped as domestic utilities have switched from coal to a cleaner fuel source: natural gas. As coal use has dropped, stockpiles have increased, setting the stage for a painful plunge in stock prices. Just this week, two coal produces, Walter Energy and Alpha Natural Resources announced plans to file for bankruptcy protection and obtain bankruptcy financing respectively.

To understand these recent developments, it’s important to explore the issues that have led up to the current situation. During the commodity’s heydey, US power companies typically consumed more than 90% of domestic coal production, but buying behaviour has slowed. Stockpiles at utilities swelled to historic highs during the 2007 – 2009 recession, about 210 million short t at their highest. Inventories have since receded, as miners have cut back. But nonetheless, supplies remain elevated.

With the Obama Administration’s introduction of the Clean Power Plan, coal producers are facing a new challenge. This ‘war on coal’ cannot be taken lightly, although many states are now beginning to fight back, including West Virginia and Kentucky, two leading states in coal production.

Share prices coming under pressure

Value Line, a provider of unbiased financial data that can be found in many libraries, recently reported that of the five remaining companies that comprise its Coal Industry report, only one is expected to suffer steep losses over the short-term, but the company in question is the sector’s largest company, Peabody Energy. In its June 5 commentary, Value Line reported that the company’s stock fell to an all-time low of US$3.41 a share from its highest level in mid-2008 (US$88.70 per share). Alpha Natural Resources has suffered as well: from its all-time peak of US$119.30 a share, the company’s stock has fallen to US$1.40 as of March 6.

(Editor's note: On 16 July, Alpha Natural Resources announced that its shares would be suspended and the company delisted from the New York Stock Exchange on the back “abnormally low” price indications of the company’s common stock. The shares were trading at US$0.07 on over-the-counter markets as of 20 July, giving the company a market cap of just US$15.78 million. Peabody Energy’s shares were trading at US$1.13 on the NYSE at market close on 20 July. Meanwhile, number-two producer, Arch Coal, announced that it would undertake a ten-for-one reverse stock split in order to boost its share price and maintain its listing on the NYSE. Arch Coal’s common stock was trading at just US$.0.22 at market close on 20 July. )

Industry consolidation

Based on these recent trends, the time may now be right for industry consolidation. Why would coal companies want to consolidate now? The main reason is that companies pursue growth through acquisitions to capture scale advantages. A size advantage lowers costs, which leads to competitive advantage and, often, to competitive price setting. Here are some consolidations worthy of consideration:

  • Alliance Resource Partners, L.P. and Consol Energy Inc., two of the best performing coal companies based on stock price ($29.35 a share as of June 5 and $29.71 also as of June 5 respectively), makes sense from several perspectives. First, they are two of the largest producers of coal and secondly, both have fairly large reserves of cash.
  • Another potential group of companies worthy of a tie-up involves Arch Coal, Alpha Natural Resources and Natural Resource Partners L.P. as all have stock prices under US$5 per share. A three-way M&A transaction may be the only alternative these companies have for survival.

Edited by .

About the author: Mark Robinson is Executive Director of Americans for Fossil Fuels

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