One Coal Company That Won't Give Your Portfolio Black Lung

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

Coal companies are facing challenges from all sides. Higher operating costs are eating away at margins, natural gas production is becoming easier with new shale technology, and environmental regulators are stomping out damaging production practices and use.

Not all companies are doomed, however, as coal exports are still promising. Let's take a look at which firms are in trouble, and which could be profitable for the next several years.

Peabody steps to the plate

Peabody Energy (NYSE: BTU) could be set to play ball in China. The industrial production in that country could very well improve as demand rises. While progress is being made in some parts of China, the nation is still not heavily regulated and Peabody could cough out considerable cash from the country.

Let's not forget that metallurgical coal is used to strengthen steel, either. That could mean that Peabody will profit from an increase in the number of buildings being erected in the developing world as well. The firm already deals closely with China, and that is the likely source of the majority of development.

Analysts see a storm before the calm. This year, the firm's earnings per share is expected to decline by 92%. It will then rise next year by 306%. Those contrasted estimates could be due to an expected recovery in steel demand next year, as well as an improving Chinese economy.

No Alpha dog here

Alpha Natural Resources (NYSE: ANR) is combining the operations of its old production efforts with the new. Since purchasing Massey Energy in 2011, Alpha has worked to create synergy between the existing company and the new arm. The Massey mines are close to the Alpha operations, something that allowed the two to combine and improve logistics.

The large basin in which both companies were operating is full of production issues, however. The area is focused on metallurgical coal, which has had a low price for more than a decade. Morningstar estimates that in order for the area to be profitable, the coal needs to be worth $250 per ton, while it has actually been priced at around $100 per ton over the last 10 years.

Analysts also think that the company is doomed. Earnings per share is expected to fall 165% this year and recover 14% next year, but still post a loss. Revenue is pegged to plummet 27.4% this year and gain only 0.1% next year.

A downward Arch in share price

Arch Coal (NYSE: ACI) won't be able to realize much in the way of profits in the next few years because it will need to take care of its massive debt (see chart below.) Realizing a profit from coal at all is a hypothetical situation, however. I believe that the company's heavy investment in Central Appalachia exposes it to too much metallurgical coal production, and I don't see prices increasing any time soon. 

ACI Total Long Term Debt data by YCharts

The company is also heavily invested in the Powder River Basin, though, and that area has lush coal deposits to extract. This presents the potential for a favorable profit margin. The coal is also in high demand by coal power plants because it has a low sulfur content, something that coal plants prefer. This could increase the price for that type of coal.

If you're going to invest in coal, this is where I'd put my money

While I am scared stiff about the prospect of investing in coal, if I were to buy a coal company then it would be Peabody. It is a risk that could be worth taking due to the low price of nearly every coal company around. Those prices are largely justified, but you might find a diamond in the rough with Peabody and secure a bargain that could add steam to your portfolio.

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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