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4 Coal Stocks to Watch From a Challenging Industry

The Zacks Coal industry stocks staged a rebound in 2022 courtesy of global demand and surging natural gas prices. However,  in 2023 demand for coal may suffer due to lesser coal utilization in the United States to produce electricity, planned retirement of coal units and the utilization of more renewable sources for electricity generation. The ongoing transition, with utility operators steadily phasing out coal units, will adversely impact the coal industry. Then again, the persisting conflict between Russia and Ukraine is creating fresh demand from coal-importing countries. Hence, coal export from the United States is expected to improve in 2023 from the year-ago level.

Even in case of a drop in coal production, low-cost coal producers like Peabody Energy Corporation BTU should benefit from their met coal and thermal coal production. With improvement in global steel production Alliance Resource Partners L.P. ARLP, SunCoke Energy SXC and Ramoco Resources. METC are expected to gain.


About the Industry

The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined by either the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity, and manufacture steel and cement. Per the U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many more years. Five states in the United States contribute nearly 70% of yearly production and 60% of coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal industry.

3 Trends Likely to Impact the Coal Industry

Despite Reliability Emission Policy to Hurt Coal Industry: The improvement in demand for coal is short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly lower the demand for coal from the U.S. electricity space. Per EIA, coal-fired electricity generation would drop from 20% in 2022 to 17% in 2023 and remain the same in 2024. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will fall significantly. Coal industry operators should brace themselves for challenges as a number of electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage. Despite the emission, coal stocks are still relevant as the commodity is a reliable source of energy and ensures 24x7 electricity production from the generation units.

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U.S. Coal Production Drops: As per EIA projection, coal production in the United States is expected to drop in 2023 and 2024 after showing an improvement in production volumes in the previous two years. EIA projects U.S. coal production to likely decline by 7% to about 550 million short tons (MMst) in 2023 and a further 9% to 500 MMst in 2024 due to the expected reduction in coal usage in electricity production in the United States. This would hurt coal operators as they fight a  tough battle against other sources of energy.

Coal to Benefit From Rising Exports: The coal operators can benefit from the expected rise in coal export volumes. Coal demand is expected to improve due to its economical pricing compared to other energy sources. Higher demand from the Asian market and an expected improvement in steel production should drive U.S. export volumes. Coal is still a viable energy option for many crucial industries across the globe. Per EIA, coal export volume may increase by 7.9% in 2023 to 91.5 MMst and by 11.5% to 101.7 MMst in 2024. Steel production requires a lot of high-quality coal, and nearly 70% of global steel production depends on coal. With the continued recovery in steel production, coal exports are expected to pick up in and improve in the long run.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Coal industry is an 11-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #180, which places it in the bottom 28% out of 251 Zacks industries.

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

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since December 2022, the industry’s earnings estimates for 2023 have gone down by 3.7%.

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

Industry Outperforms S&P 500 & Sector

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

The stocks in the coal industry have gained 8.4% compared with the Zacks Oil-Energy sector’s growth of 0..9%. The Zacks S&P 500 composite has declined 9.9% in the same time frame.

One-Year Price Performance



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 a trailing 12-month EV/EBITDA of 2.57X compared with the Zacks S&P 500 composite’s 12.48X and the sector’s 2.91X.

Over the past five years, the industry has traded as high as 7.6X, as low as 2.21X and at the median of 4.8X.

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector



4 Coal Industry Stocks to Keep a Close Watch On

SunCoke Energy: Lisle, IL-based SunCoke Energy, is a raw material processing and handling company serving steel and power customers, with principal businesses in cokemaking and logistics. With annual 5.9 million tons of coke-making capacity, it is poised to benefit from rising met coal export and increasing demand for met coal from the steel industry. The company plans to invest $95 million in 2023 to further expand its operations.

The Zacks Consensus Estimate for 2023 and 2024 earnings has moved up by 4.1% and 22.4%, respectively, in the past 60 days. Current dividend yield of the company is 3.65%, much better than its industry’s yield of 0.37%. The stock has gained 38.2% over the past six months against its industry’s decline of 10.9%.

SunCoke Energy is currently having a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: SXC

Peabody Energy: St Louis, MO-based Peabody Energy carries a Zacks Rank #3 (Hold) and engages in the coal mining business and has both thermal and metallurgical operations. In 2022, nearly 28% of the company’s revenues were derived from five customers with whom it still has 16 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2023 to 2025. This assures a steady flow of revenues. The Zacks Consensus Estimate for Peabody Energy’s 2023 revenues suggests a year-over-year rise of 8.5%. The Zacks Consensus Estimate for BTU’s earnings per share has remained unchanged in the past 30 days. The stock has lost 6.3% over the past six months.

Price and Consensus: BTU

 

Alliance Resource Partners L.P.: Tulsa, OK- based Alliance Resource Partners produces and sells coal to utilities and industrial users in the United States. The firm produces coal from seven mining complexes operated by its subsidiaries. ARLP earns royalty income from coal produced by its mining complexes and royalty income from mineral interests it owns in different basins. In the 2021-2022 period, exports represented 12.5% of total tons sold each year. The firm currently has a Zacks Rank #3. The Zacks Consensus Estimate for 2023 earnings per unit and revenues implies a year-over-year rise of 38.7% and 20.2%, respectively.

Price and Consensus: ARLP

Ramaco Resources, Inc.: Lexington, KY-based Ramaco Resources carries a Zacks Rank of 3. The developer of high-quality, low-cost metallurgical coal is poised to benefit from improving metallurgical coal demand.To meet the rising demand for met coal, the company intends to increase production from under 2 million tons per year in 2020-21 to up to 3.5 million tons in 2023, with a goal of increasing production volumes to 6.5 million tons by 2026. The Zacks Consensus Estimate for Ramaco Resources’ 2023 and 2024 earnings has moved up by 14.5% and 9.5%, respectively, in the past 30 days. The current dividend yield of the company is 5.67%.

Price and Consensus: METC


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Peabody Energy Corporation (BTU) : Free Stock Analysis Report

Alliance Resource Partners, L.P. (ARLP) : Free Stock Analysis Report

SunCoke Energy, Inc. (SXC) : Free Stock Analysis Report

Ramaco Resources, Inc. (METC) : Free Stock Analysis Report

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