Chicago, IL – November 8, 2024 – Today, Zacks Equity Research discusses Peabody Energy BTU, Warrior Met Coal HCC, CONSOL Energy CEIX and SunCoke Energy SXC.
The Zacks Coal industry stocks are suffering due to a decline in the use of coal in thermal power plants in the United States. In 2024, the demand for coal has been adversely impacted by the planned retirement of coal units and the utilization of more renewable sources for electricity generation.
The ongoing energy transition, with utility operators steadily phasing out coal units, may hit the coal industry. Then again, the continuing conflict between Russia and Ukraine is creating fresh demand from European coal-importing countries.
Despite a drop in coal production, expected export volume improvements in 2024 are likely to boost the prospects of coal stocks like Peabody Energy. Other coal stocks like Warrior Met Coal, CONSOL Energy and SunCoke Energy, with high-quality met production volumes, are expected to gain during this difficult phase.
About The Coal Industry
The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined through the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity and manufacture steel and cement. Per the U.S. Energy Information Administration ("EIA") report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many years.
Five states in the U.S. contribute 70% of the yearly coal production and 60% of the coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal industry.
3 Trends Likely to Impact the Coal Industry
U.S. Coal Production, Price & Exports Drops: Per EIA's projection, coal production in the United States is expected to drop in 2024 and 2025. The EIA projects U.S. coal production to decline 13.1% from 2023 levels to about 510 million short tons (MMst) in 2024 and register a decline of nearly 5.2% to 485 MMst in 2025 due to the expected reduction in coal usage in electricity production.
The EIA projects 2024 coal price to decrease 1.6% from the 2023 level to $2.48 per million British thermal units (Btu) and further drop 2.1% in 2025 to reach $2.43 per million Btu. This would adversely impact the coal operators as they continue to fight a tough battle against other cleaner energy sources. The EIA projects coal exports from the United States to drop by 2.4% in 2025 from the 2024 levels after improving 5.1% from 2023 levels. The World Steel Association forecasts a drop in global steel demand, dropping 0.9% in 2024 to touch 1,751 metric tons (Mt) and expected to increase by 1.2% in 2025 to reach 1,772 Mt.
Steel production requires ample high-quality coal and nearly 70% of global steel production depends on it. With the global weakness in steel demand, coal exports are expected to drop from current levels.
Despite Reliability, Emission Policy to Hurt Coal Industry: Coal is still a reliable source of energy and ensures 24x7 electricity production from the generation units. However, increasing emission concerns are resulting in reduced usage of coal in electricity generation. The United States' Sustainability Plan includes an aim toward transitioning to 100% carbon pollution-free electricity by 2030 and achieving net-zero emissions by 2050. Utility operators are now focused on generating more electricity from clean energy sources, lowering coal usage and gradually shutting down the existing coal-based electricity generation units.
Per the EIA, the share of coal in U.S. electricity generation is likely to drop from 17% in 2023 to 16% in 2024 and 2025. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will continue to drop. Coal industry operators should brace themselves for challenges as several electric utilities have decided to become carbon neutral and are aggressively cutting down on coal usage. Coal-fired units are gradually becoming backup units for utility operators in case of emergency power requirements, and 12 GW of coal-fired electricity generating capacity is going into retirement.
Interest Rate Decline is a Tailwind: In order to maintain, upgrade and expand coal operations, coal company operators approach capital markets for loans. The U.S. Federal Reserve has finally lowered the benchmark rate by 50 basis points, bringing down rates to a range of 4.75%-5%. The rates were lowered for the first time in four years. Capital-intensive coal companies will benefit from the Fed's decision to reduce interest rates. The drop in interest rates is a big positive for coal operators that are planning investments in infrastructure upgrades.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Coal industry is a nine-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #151, which places it in the bottom 40% out of 251 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry's position in the bottom 40% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group's earnings growth potential. Since November 2024, the coal industry's earnings estimates for 2024 have declined 6.2% to $3.52 per share.
Before we present a few coal stocks that you may want to keep track of, let's take a look at the industry's recent stock market performance and valuation picture.
Industry Outperforms Sector & S&P 500
The Zacks Coal industry has outperformed the Zacks Oil and Gas sector and Zacks S&P 500 composite over the past year.
The stocks in the coal industry have gained 37.9% compared with the Zacks Oil-Energy sector's rally of 13.5%. The Zacks S&P 500 composite has gained 37.5% in the same time frame.
Coal Industry's Current Valuation
Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
The industry is currently trading at a trailing 12-month EV/EBITDA of 5.55X compared with the Zacks S&P 500 composite's 17.77X and the sector's 3.41X.
In the past five years, the industry has traded as high as 7.79X and as low as 2.04X, with the median being 4.41X.
4 Coal Industry Stocks to Keep an Eye On
CONSOL Energy: Canonsburg, PA-based CONSOL Energy produces and exports bituminous thermal coal and metallurgical coal. The company owns and operates the Pennsylvania Mining Complex and the Baltimore Marine Terminal and controls more than 1.3 billion tons of thermal and metallurgical coal reserves and resources located in the major coal-producing basins of the eastern United States. The company is consistently operating multiple longwalls to meet increasing demand.
The Zacks Consensus Estimate for 2025 earnings and revenues suggests a year-over-year rise of 31.8% and 112.1%, respectively. The stock has gained 37.2% over the past 12 months, outperforming its industry's rally of 27%. CEIX currently has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Peabody Energy: St Louis, MO-based Peabody Energy engages in the coal mining business and has thermal and metallurgical operations. Peabody has the flexibility to increase volumes should demand warrant. Peabody expects its 2024 seaborne Thermal and Metallurgical coal export volumes to better than expected due to high demand from its customers.
The Zacks Consensus Estimate for Peabody Energy's 2024 and 2025 earnings per share has increased 1.3% and 3.7%, respectively, over the past 90 days. The company's current dividend yield is 1.1% compared with the industry's yield of 0.68%. The stock has gained 33.6% over the past 12 months. Peabody Energy currently has a Zacks Rank #3 (Hold).
Warrior Met Coal, Inc.: Brookwood, AL-based Warrior Met produces and exports metallurgical coal for the steel industry. The company will benefit from the end of the labor strike and the resulting incremental production volume as eligible employees return to work. Warrior Met plans to invest $435-$500 million in 2024 to further strengthen its coal operation. The company is presently developing its Blue Creek mine.
The Zacks Consensus Estimate for its 2024 earnings per share has moved up by 1.3% in the last 60 days. The current dividend yield of the company is 0.47%. The stock has gained 62.1% in the past year. Warrior Met Coal currently carries a Zacks Rank of 3.
SunCoke Energy: Lisle, IL-based SunCoke Energy is a raw material processing and handling company serving steel and power customers, with principal businesses in coke making and logistics. With an annual 5.9 million tons of coke-making capacity, it is poised to benefit from rising met coal exports and increasing demand for met coal from the steel industry. The company plans to invest between $75 million and $80 million in 2024 to expand its operations.
The Zacks Consensus Estimate for its 2024 earnings per share indicates an year-over-year increase of 38.3%. The current dividend yield of the company is 4.36%. The stock has gained 49.8% in the past year. SunCoke Energy carries a Zacks Rank #3 at present.
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