Zacks Industry Outlook Highlights: Peabody Energy, Arch Coal, Alpha Natural Resources, Cloud Peak Energy and CONSOL Energy
CHICAGO, Nov. 27, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Coal, including Peabody Energy Corporation (NYSE:BTU-Free Report), Arch Coal Inc. (NYSE:ACI-Free Report), Alpha Natural Resources Inc. (NYSE:ANR-Free Report) and Cloud Peak Energy (NYSE:CLD-Free Report) and CONSOL Energy Inc. (NYSE:CNX-Free Report).
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Industry: Coal
Link: http://www.zacks.com/commentary/30094/coal-industry-stock-outlook---nov-2013
Coal plays a vital role in the economic development of a country. Coal not only provides a cheap source of electricity production but also creates employment opportunity for thousands of people. Coal with its heat generating capability also plays an essential role in the chemical, fertilizer and steel industries.
Coal is a dominant source of power generation worldwide despite the increasing use of other resources. According to the Energy Information Administration (EIA), coal still plays an important role in the U.S. in the generation of power. However, natural gas is eating away its share at a very fast pace. As per the EIA, coal's annual share of total power generation in the U.S. declined from 50% in 2007 to 37% in 2012. The usage of natural gas and alternate sources for power generation will continue to pose challenges to coal.
The U.S., Russia, Australia, China, India and South Africa have the largest coal reserves in the world. Coal is produced in 25 states in the U.S., though the bulk of current production takes place in just five states: Wyoming, West Virginia, Kentucky, Pennsylvania and Montana.
According to estimates by the EIA, the country's current coal reserves will last for 168 years at the current production rate. They might in all likelihood last even longer with environmental issues coming in the way. However, if the fuel's environmental standing can be improved, there could potentially be new sources of end-market demand in the future, in communications and transportation systems, computer networks and even space expeditions.
As per the World Coal Association (WCA), proven global coal reserves will last nearly 112 years at current production rates. On the other hand, proven oil and gas reserves are projected to last around 46 years and 54 years, respectively, at current production levels. Asia is the biggest coal market and presently accounts for 67% of the global coal consumption.
There is no denying the manifold advantages of coal. However, unchecked usage of this fossil fuel has raised concerns in all quarters. The primary cause of concern related to coal is global warming caused by the emission of greenhouse gases. The U.S. government has been pretty vigilant, enforcing stricter regulations on coal-fired generating units to curb pollution.
President Obama's Climate Plan, followed by the U.S. Environmental Protection Agency's (EPA) proposal for granting permission for setting up new power plants, is putting immense pressure on power producing units. If the new regulations are implemented it will increase the cost of power generation from coal fired plants.
In the light of these issues, if the U.S. electricity generators opt for natural gas for power generation and invest more in alternate sources, what will be in stake for coal companies?
Moreover, Europe is a big export market for the U.S. coal producers. The European Investment Bank (EIB) said it would stop financing the majority of coal-fired power stations to help the European Union's 28-nation coalition reduce environmental pollution. New coal units will not be funded unless the emission level is less than 550 grams of carbon dioxide per kilowatt-hour (gCO2/kW).
Given the mounting environmental pressure, there is definitely a push away from coal as a power source. However, on a global scale, coal still leads the way. There is still hope for coal companies if they can produce high-efficiency coal. Technological advancement and carbon capture and storage offer possible remedies for coal's future.
Zacks Rank
The Zacks Industry Rank, which relies on the same estimate revisions methodology that drives the Zacks Rank for stocks, currently puts the Coal industry at 104 out of 259 industries in our expanded industry classification. This puts the industry in the middle third of all industries, corresponding to a neutral outlook.
The way to look at the complete list of 259+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #85 and lower) is positive, the middle one-third of the list (Zacks Industry Rank of #86 to #169) is neutral while the outlook for the bottom one-third (Zacks Industry Rank #170 and higher) is negative.
Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).
None of the 20 companies in the Coal industry under our coverage has a Zacks Rank #1 (Strong Buy); 2 have a Zacks Rank #2 (Buy), while 2 have a Zacks Rank #4 (Sell) and none are rated Zacks Rank #5 (Strong Sell). The other 16 have Zacks Rank #3 (Hold). Overall, the Zacks Rank for the industry and for individual stocks indicate our neutral stance on the industry.
Earnings Review and Outlook
The coal industry's overall earnings results in the third quarter were on the softer side. However, the top four U.S. coal producers, namely, Peabody Energy Corporation (NYSE:BTU-Free Report), Arch Coal Inc. (NYSE:ACI-Free Report), Alpha Natural Resources Inc. (NYSE:ANR-Free Report) and Cloud Peak Energy (NYSE:CLD-Free Report) either surpassed the consensus estimates or were in line with expectation. CONSOL Energy Inc. (NYSE:CNX-Free Report), holding the 5th position, posted third quarter earnings much lower than the consensus.
In total, 53% of the coal companies in our coverage either met or came out with positive earnings surprises in the third quarter, below the 65.3% average for the S&P 500.
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