Coal: To Buy or Not to Buy

There’s been a bit of bullishness creeping into the coal stocks during the last few months. Is it time for the group to rally?

Bloomberg

During the past three months, Consol Energy (CNX) has gained 11%, Peabody Energy (BTU) has risen 3.4% and Cloud Peak Energy (CLD) has dropped just 0.8%. (Arch Coal (ACI), it should be noted, has plunged 11% during that time period.) Is this the start of a good thing?

Macquarie’s Luke McFarlane and Aldo Mazzaferro see positive signs for the coal stocks:

We continue to interpret the two diverging stories in the US thermal market; with
utilities and rails believing coal is still available and being delivered, while coal
producers note higher demand and order books which are close to full…Coal producers in the [Powder River Basin] continue to see material year over year demand growth, with one noting a 30% increase in PRB utility nominations through April…

McFarlane and Mazzaferro call Consol Energy their top pick, and give Outperform ratings to Cloud Peak Energy–”a good opportunity to buy a well positioned PRB pure play heading into the summer,” McFarlane and Mazzaferro note–and Peabody Energy–”cash flows from [Peabody's PRB operations can support its depressed met operations." They give Arch Coal a Neutral rating, as they're concerned about its cash burn.

Nomura's Curt Woodworth and team have their doubts about the Powder River Basin rally:

In our view, the market has been over exuberant about the possibility of a [Powder River Basin Coal] price spike, as inventories are now simply closer to normal levels and any pockets of tightness are likely to fade by year end. As such, we believe further downside risks exist to Arch Coal and Peabody Energy.

Investors have their doubts too, by the looks of things. Shares of Peabody Energy have fallen 2.9% to $17.53 at 2:46 p.m. today, while Arch Coal has cropped 2.1% to $3.78, Cloud Peak Energy has declined 1.2% to $18.22 and Consol Energy is off 0.9% at $44.11.