Coal industry stocks have been under tremendous stress due to concerns about the impact of rising emissions. Coal is gradually losing ground to natural gas and clean alternate sources of energy. Decline in prices and demand has been hurting profit levels of operators over the past few years. However, with gradual rollout of vaccines and improving economic activity globally, stocks like Alliance Resource Partners ( ARLP Quick Quote ARLP - Free Report) , having exposure in thermal coal, are well poised to benefit from the revival in the domestic and international coal markets. Other coal stocks that are poised to benefit from an expected increase in coal demand in 2021 are SunCoke Energy ( SXC Quick Quote SXC - Free Report) , Peabody Energy ( BTU Quick Quote BTU - Free Report) and Ramaco Resources ( METC Quick Quote METC - Free Report) . About the Industry
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.
Per The U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves is at 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 of the United States currently contribute more than 70% of total yearly coal production. More than 60% of the coal production in the United States comes from surface mining. 3 Trends Likely to Impact the Industry : The United States-based coal companies are presently fighting a lost cause. Clean energy sources like natural gas and renewable energy are now being preferred over coal for their energy needs. The 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 outbreak of novel coronavirus also adversely impacted demand for coal globally. A transition is quite evident with utilities currently favoring clean energy sources compared to coal. Utilities are targeting net zero emission, shutting down coal-fired plants and replacing the generation with clean sources. The domestic consumption of coal will drop further over the long term as quite a few coal-fired plants are scheduled to be shut down by 2030. Per a report of environmental group Sierra Club, since 2010, 63% of U.S. coal fired plants have been retired or committed to retire by 2030. Losing Ground to Clean Energy Sources Coal exports have been aiding U.S. miners to regain some lost ground. However, in 2020, the outbreak of novel coronavirus and implementation of various degrees of lockdown had an adverse impact on industrial and commercial activities across the globe. As a consequence, U.S. coal exports dropped in 2020. However, per EIA, due to the revival of global economic activities post pandemic leading to improving steel production and power demand on a global scale, metallurgical and coking coal export volumes are likely to increase in 2021. Per EIA, coal exports will total 85 MMst in 2021, up 24% from 2020 and further rise by 6 MMst in 2022 to 91 MMst. Coal Exports Likely to Rise: : A recent EIA release predicts coal production to increase by 9% from 2020 levels to 589 MMst in 2021. This projection takes into consideration rising demand for coal amid U.S. electricity generators because of higher natural gas prices compared with 2020. Coal production is expected to improve by 1% or 5MMst tons in 2022. Moreover, the U.S. Environmental Protection Agency (“EPA”) announced final revisions to guidelines and standards for “steam electric” power plants. The 2020 Steam Electric Reconsideration Rule will aid the coal industry. Per the new rule, coal-fired power plants that discharge bottom ash transport water or flue gas desulfurization wastewater may incur compliance costs under the 2020 final rule. EPA estimates 75 plants may incur compliance costs under the final rule, in an industry population of 914 plants. We expect this development to aid the coal industry and create fresh domestic demand for coal going forward. Rising Coal Production & Favorable Rule Zacks Industry Rank Indicates Weak Prospects
The Zacks Coal industry is a 10-stock group within the broader Zacks
Oil and Energy sector. The industry currently carries a Zacks Industry Rank #205, which places it in the bottom 19% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak 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 19% 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 February 2020, the industry’s earnings estimate for 2021 has gone down by 15.3%. 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, Outperforms Sector
The Zacks Coal industry has underperformed the Zacks S&P 500 composite but outperformed the Zacks Oil and Gas sector over the past 12 months.
The stocks in the coal industry have collectively declined 7.7% compared with the Zacks Oil-Energy sector’s decrease of 17%. In contrast, the Zacks S&P 500 composite has risen 17.9%. 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 7.07X compared with the Zacks S&P 500 composite’s 16.73X and the sector’s 5.2X. Over the past five years, the industry has traded as high as 7.16X, as low as 2.69X and at the median of 4.24X. 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 Alliance Resource Partners: Tulsa, OK-based Alliance Resource Partners produces and markets coal primarily to domestic and international utilities and industrial users. The firm is among the largest coal producer in Eastern United States having control over seven underground mining complexes. The company is poised to benefit from expected increase in the United States power generation in 2021 and high natural gas price creating fresh demand for thermal coal from utilities. The Zacks Consensus Estimate for Alliance Resource Partners’ 2021 earnings and revenues suggests a year-over-year rise of 200.9% and 10.4%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 145.2%. The stock has gained 78% over the past three months. Alliance Resource Partners currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Price and Consensus:ARLP SunCoke Energy: Lisle, IL-based SunCoke Energy, having a Zacks Rank of 2, 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 export revival and recovery in steel industry through 2021. The Zacks Consensus Estimate for 2021 earnings and revenues points to a year-over-year rise of 4900% and 7.3%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 11.1%. The stock has gained 57.2% over the past three months. Price and Consensus:SXC Peabody Energy: St Louis, MO-based Peabody Energy, having a Zacks Rank of 3 (Hold), engages in the coal mining business and has both thermal and metallurgical coal operations. Nearly 33% of its revenues in 2019 were derived from five customers and with them the company still has 43 coal supply agreements (excluding trading and brokerage transactions) expiring at various times from 2020 to 2025, which assures a steady flow of revenues. The Zacks Consensus Estimate for Peabody Energy’s 2021 earnings and revenues suggests a year-over-year rise of 88.6% and 5.1%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 19.1%. The stock has gained 303.5% over the past three months. Price and Consensus:BTU Ramaco Resources: Lexington, KY-based Ramaco Resources is a Zacks Rank #3 stock. The company produces and sells metallurgical coal. The company has in excess of 265 million tons of high quality coal reserves and is well positioned to sell coal to domestic as well as international markets. Its low debt and minimal legacy liabilities provide it financial flexibility. The company supplies substantial volume of high-quality met coal to domestic steel companies. The Zacks Consensus Estimate for its 2021 earnings and revenues points to a year-over-year rise of 2900% and 41.2%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 6.3%. The stock has gained 15.9% over the past three months. Price and Consensus:METC