The coal sector is clearly in a depression, which has been caused by a variety of reasons, mainly the federal government's warning on all things coal. Since President Obama took office, increasing regulations have hurt coal production and forced ulitities to cut back on coal and use other sources of energy. In addition, coal has been unable to complete against lower cost energy sources like natural gas, and now oil, which is selling at around $50 a barrel thanks to OPEC and the shale boom. All of this has lead the coal sector to fall into a depression with multiple coal companies now selling for less than a $1. Walter Energy (WLT, Financial) has filled for bankruptcy which is the first of many to come, according to some on Wall Street. This has created an opportunity for investors to find coal companies that will survive and return to profitablity.
Coal Companies
Cloud Peak Energy (CLD, Financial)
Cloud Peak is one of the few publicly traded coal companies that is profitable and free cash flow positive. Cloud Peak is selling for 2x its earnings and 0.2x its tangible book value. Cloud Peak as well has over $180 million in cash on its balance sheet. The company's cash makes up about half its market cap of $244 million. Cloud Peak has a earning power value of $15.00 and tangible book value of $13.00 per share. At its current market price, Cloud Peak is selling far less than its estimated business value, which is closer to $7.00.
Alpha Natural Resource (ANR, Financial)
ANR data by GuruFocus.com
The company's stock is selling for $0.28/share and has a tangible book value of $13.07/share. Alpha has for the last few years reported earnings loss and hasn't been free cash flow positve since 2012. Currently the company has over $700 million in cash and another $400 million invested in marketable securities. The company's total assets exceeds its liabilties by 3x which is a lot better than Cloud Peak. Alpha Natural hasn't been able to produce a single penny in earnings and can't pay its debts or interest with earnings or cash flow. This means the company is going to draw on its over $1.1 billion in cash and marketable securities. Alpha Reserves debt outnumbers its cash and marketable securities 7 to 1. The company sells for 0.02x its tangible book value and its cash and marketable securieties exceeds market value by over a 100 times. I don't know if the company can regain its profitability or will end up filing for bankruptcy just like Walter Energy.
Peabody Energy (BTU, Financial)
BTU data by GuruFocus.com
The company, like others in its industry, has been reporting losses for the last few years and isn't cash flow positive. The company has a tangible book value of $10.04 and sells for 0.17x tangible book value. Peabody has total assets of $13 billion and total liabilities of $10 billion. Peabody has $298 million in cash which makes up around half of the company's market cap.
ACI data by GuruFocus.com
The company has reported net losses and negative cash flow for the last few years. Currently Arch Coal is selling for $0.29 and has a tangible book value of $7.86. The company is selling for 0.04x its tangible book value and has a debt to equity ratio of 3.09. Arch Coal currently has $690 million in cash and another $250 million in marketable securities for a total of $930 million in cash and marketable securities on its balance sheet. The company has total assets of $8 billion and total liabilities of $6 billion with assets exceeding liabilites by over 1.3x.
Walter Energy (WLT, Financial)
WLTG data by GuruFocus.com
The company today filed for Chapter 11 Bankruptcy protection. Walter plans to swap senior creditors' debt for ownership of the company. This may cause junior creditors to be wiped out. Walter is also seeking to use Chapter 11 to reduce its labor cost mainly from its pension plan for employees. If this process isn't successful, the company will seek a sale of all its assets. Currently the company is selling for $0.09 and has a tangible book value of $3.00. Walter Energy has a debt to equity ratio of 11.2 and cash of $400 million. I do not know how the bankruptcy will go or if the company will succeed in its plan. This may be the first of many more bankruptcies in the coal sector. Alpha Natural may be planning bankruptcy financing in its near future.
Conclusion
The coal sector is clearly in a depression, which will lead to the weaker companies having to file for bankruptcy, liquated, and sold to larger competitors. Based on the current information Cloud Peak is financially the strongest in the coal sector; this is the company to buy shares in. If I was a betting man, when the coal sector finally recovers, Cloud Peak will be the top dog in the sector.
