Can Alpha and the Coal Complex Survive the Future?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Alpha Natural Resources (NYSE: ANR) is the largest supplier of metallurgical coal used in steel making and one of the country’s biggest producers of thermal coal used for electrical generation.  The share prices of coal stocks have been highly volatile over the past year, few more so than Alpha. Warmer weather, more regulatory control, and declining gas prices have hit U.S. coal stocks hard.

Natural gas is priced locally, not globally, so U.S. producers are ready to increase exports to regions where natural gas prices are higher. Right now, the shares of Alpha and other producers are rising as more analysts predict better conditions next year. 

Future Prospects

The shale gas revolution in the U.S. has driven the price of natural gas to historic lows; coal is losing its cost advantage. Despite the fact coal is still in abundance, natural gas as a cleaner and now more cost effective alternative poses a serious threat to the coal complex. No one denies that coal is dirty.  Much has been made of the potential of what has come to be known as “clean coal technologies.”

Those who dispute the notion that coal can ever be made “clean” would do well to look back in time at other technological breakthroughs that have yielded outcomes once thought impossible. During the oil crisis in the late 1970’s doomsday prognosticators could not possibly imagine drilling for oil a mile below the surface of the ocean. Nevertheless, technology made it happen. At the turn of the century who would have dreamed by the end of the first decade forecasters would predict the U.S. would overtake Saudi Arabia as the world’s largest oil producer by 2020.  The coupling of two technologies, vertical drilling and hydraulic fracturing, are making it happen.

The point is simple: do not count coal out just yet.  Technology may yet emerge to put coal back in the forefront of the energy mix.

Alpha vs. the Rest

The following table looks at some key performance metrics for Alpha and two other major US-coal producers, Arch Coal (NYSE: ACI), and Peabody Energy (NYSE: BTU).

<table> <tbody> <tr> <td> <p><strong>Indicator</strong></p> </td> <td> <p><strong>Alpha Natural Resources </strong><strong></strong></p> </td> <td> <p><strong>Arch Coal</strong><strong></strong></p> </td> <td> <p><strong>Peabody Energy </strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$2.06 billion</p> </td> <td> <p>$1.6 billion</p> </td> <td> <p>$7.41 billion</p> </td> </tr> <tr> <td> <p><strong>Trailing P/E</strong></p> </td> <td> <p>-</p> </td> <td> <p>-</p> </td> <td> <p>11.44</p> </td> </tr> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p>-</p> </td> <td> <p>-</p> </td> <td> <p>14.16</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong></p> </td> <td> <p>0.40</p> </td> <td> <p>0.51</p> </td> <td> <p>1.25</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong></p> </td> <td> <p>-</p> </td> <td> <p>1.59%</p> </td> <td> <p>1.23%</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>-45.7%</p> </td> <td> <p>-9.5%</p> </td> <td> <p>14.08%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>0.59</p> </td> <td> <p>1.34</p> </td> <td> <p>1.07</p> </td> </tr> <tr> <td> <p><strong>Q Share Price Performance</strong></p> </td> <td> <p>+27.25%</p> </td> <td> <p>+13.17%</p> </td> <td> <p>+15.18%</p> </td> </tr> </tbody> </table>

Based strictly on these numbers, Peabody is clearly the superior performer.  Return on Equity of 14.08% is solid and dwarfs the returns of the other two producers.  Both Alpha and Arch are trading below book value per share, making those stocks potential value propositions. However, remember that those ratios are low due to the dramatic year over year drop in share price.  Alpha has declined about 55% year over year, Arch has dropped 48%, and Peabody has fallen 20%.

Alpha shows the healthiest debt position, with a debt to equity ratio of 0.59 compared to the other two producers above the danger point of debt to equity ratios over 1.0. The only measure on which Alpha outperforms is recent share price performance. Over the last quarter, its share price has risen almost twice as much as that of Arch and Peabody.

Foolish Summary

One could make a strong case that companies like Alpha are best left to momentum traders. Coal is not going to disappear overnight, but its future position as a top tier source of energy is far from certain. Markets do not like uncertainty. However, if natural gas prices pick up, I expect coal producers to follow.


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