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World Coal
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August 2015
Coal News
Coal News
B
y any standards, this summer
has been awful for the US coal
industry. Midway through last month,
Walter Energy filed for bankruptcy,
following Patriot Coal, which declared
bankruptcy in May. “In the face of
ongoing depressed conditions in the
market for metallurgical coal, we must
do what is necessary to adapt to the new
reality in our industry,” the company said
in a statement.
Falling giants
Aday later, Alpha Natural Resources
(ANR) said its shares were being
suspended from the New York Stock
Exchange (NYSE) as part of a process to
delist the company following “abnormally
low” pricing indications.
On 20 July, Arch Coal was plunged into
the fray as it tried to avoid delisting from
the NYSE with an unconventional
one‑for‑ten reverse stock split. This would
see every ten shares of Arch’s common
stock converted into one share – effectively
reducing the outstanding shares from about
213 million to 21.3 million and boosting the
companies share price from 20 cents to over
US$2. The company then delayed the move
for “administrative purposes”,
rescheduling to 3 August.
Consol Energy and Peabody Energy
continued the gloom with both announcing
large quarterly losses. Both took substantial
impairment charges on assets – Peabody on
its Australian metallurgical coal operations
and US assets held for sale and Consol on
its oil and gas assets.
Peabody’s quarterly loss came in at just
over US$1 billion after US$900.8 million of
writedowns. The day before the results
were announced, Fitch Ratings had
downgraded Peabody’s rating to CCC,
indicating a high risk of default. “Weakness
in pricing for the company’s Australian
coals [..] coupled with high interest expense
following the 2011 leveraged acquisition of
Macarthur Coal Ltd has resulted in low
earnings, cash flows and debt repayment,”
the ratings agency said in a statement.
Fitch was also negative on the thermal
coal side: “Steam coal demand in the US is
currently suffering from heavy competition
from very low natural gas prices [...] stocks
are on the high side and prices are soft.
Lack of new coal-fired power plant builds
and shuttering obsolete plants constrains
growth in the US. Globally, both
metallurgical and steam coal markets are in
excess supply and prices are weak.”
Meanwhile, Consol announced a net
loss of US$603 million with coal revenues
down in 2Q15 to US$414.5 million from
US$536.3 million over the same period last
year. The real damage for Consol, however,
came from its shallow oil and natural gas
business, which took an impairment charge
of US$829 million.
The bad news then continued into
August as ANR followed its delisting from
the NYSE by filing for bankruptcy on
3 August. “The change and challenges the
US coal industry has experienced over the
last several years are greater than any in the
past three decades,” Chairman and CEO of
ANR, Kevin Crutchfield, said in the
company’s announcement. The company
has secured an 18 month financing package
worth US$692 million to take it through
bankruptcy proceedings.
More pain to come
More pain may be on the way, according
Moody’s VP Senior Analyst,
Anna Zubets‑Anderson. “More
bankruptcies or some form of distressed
restructurings are likely as long as
business conditions and prices remain
where they are,” the Moody’s analyst told
World Coal
. “There are a number of highly
leveraged companies rated in the Caa
category that remain vulnerable to a
restructuring, including Arch Coal.” It’s a
long way from 2011 when Peabody’s
shares peaked at US$72.71 and ANR’s at
US$65.25.
Overall the outlook is pretty dim,
continued Zubets-Anderson: “The
outlook is negative. We expect
metallurgical coal markets to remain weak
due to the weak demand from China,
while US domestic thermal coal
consumption will continue to be
pressured by regulation and low-priced
natural gas.”
But not all is lost
Not all regions will be impacted equally,
however, with the Illinois Basin the best
positioned basin in the US. “Due to low
cost structure, [Illinois Basin] coal can be
competitive even in weak seaborne
markets,” said Zubets-Anderson. “Also,
as small coal-fired plants retire in the
eastern US, larger plants have to run at
higher capacity factors. The larger
baseload plants continue to switch to
Illinois Basin coal, due to its low cost, and
because they have the necessary
equipment to process its higher sulfur
content.”
On the company side, the industry’s
smaller, more nimble players, offer better
outlooks than the bigger companies:
“Smaller players focused in niche markets
seem to be best positioned to weather the
storm,” said Zubets-Anderson, listing
Murray Energy, Foresight Energy, Bowie
Resources, Westmoreland Coal and
Cloud Peak Energy. “Recently,
Murray Energy acquired significant
interest in Foresight, consolidating a
significant proportion of the Illinois Basin
market under the same management.
There may be other opportunities for
consolidation, particularly as distressed
companies attempt to sell assets and/or
go through bankruptcies.”
US
Financial woes continue to hit the industry as prices continue to slide
