Monday, June 20, 2016

Coal may have gotten so bad that it's getting good for investors; production has surged since April

U.S. coal production recently hit historically low level, but is rebounding, and investors seem to think it has bottomed out, BB&T capital markets analyst Mark Levin said in a note to clients last week. Tim Loh of Bloomberg reports on that, adding: "Some coal stocks are rallying as a recovery in natural gas prices brings the power-plant fuels closer to parity." With a chart, Bloomberg cites a two-month rise in stock prices of Alliance Resource Partners and CNX Coal Resources and notes a report from the Energy Information Administration that weekly coal production is up 26 percent since April.

Levin said in his note, “Markets are a forward-looking mechanism, and what they are saying right now about coal in 2017 is bullish.” He said bankruptcies of major coal companies have reduced the over-supply built up during a mild winter, and a hot summer would lead to higher demand. Also in coal's favor is a 60 percent rise in natural-gas futures since March, Loh reports: "That has made coal mined in the Powder River Basin of Wyoming and Montana and, to a lesser extent, in the Illinois Basin, more cost-competitive, said Andrew Cosgrove, an analyst at Bloomberg Intelligence."

Still, "Coal bulls face daunting challenges," Loh writes, quoting Cosgrove: “The sentiment back in January was about as low as it could possibly get. Some people invest off that premise and you never know. Coal’s been beaten up for the better part of six years. Any green shoots whatsoever, people may choose to hang their hat on that.”

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