Mention the word “coal” to most investors without the word “short” attached in some way and they, understandable and usually rightly, run as fast as they can to get away from the crazy person talking to them. Despite the industry’s best efforts to promote what they refer to as ‘clean coal”, most people view the fuel as dirty, dangerous to recover and essentially a thing of the past.
That perception is certainly held by the current administration in the U.S., where the Environmental Protection Agency (EPA) rules regarding emissions will effectively close dozens more coal fired power plants over the next few years. Overseas, even the Chinese and the Indians have at least paid lip service to cleaner electricity production recently and declared an intention to move away from coal. When push comes to shove I am still not convinced that the necessary huge investment to make that shift will be forthcoming in either case but, even without that, low global prices and relatively high production costs have made exports unlikely to fill the gap between supply and demand here in the U.S. Indeed, total exports of coal dropped by 21.8 percent from 74,981,013 short tons in 2014 to 58,659,154 last year, according to the EIA.
Those realities have certainly been reflected in the stock and fortunes of U.S. coal producing companies. Bankruptcy has already been declared by Patriot Coal, Alpha Natural Resources, and Arch Coal and, any day now…
Mention the word “coal” to most investors without the word “short” attached in some way and they, understandable and usually rightly, run as fast as they can to get away from the crazy person talking to them. Despite the industry’s best efforts to promote what they refer to as ‘clean coal”, most people view the fuel as dirty, dangerous to recover and essentially a thing of the past.
That perception is certainly held by the current administration in the U.S., where the Environmental Protection Agency (EPA) rules regarding emissions will effectively close dozens more coal fired power plants over the next few years. Overseas, even the Chinese and the Indians have at least paid lip service to cleaner electricity production recently and declared an intention to move away from coal. When push comes to shove I am still not convinced that the necessary huge investment to make that shift will be forthcoming in either case but, even without that, low global prices and relatively high production costs have made exports unlikely to fill the gap between supply and demand here in the U.S. Indeed, total exports of coal dropped by 21.8 percent from 74,981,013 short tons in 2014 to 58,659,154 last year, according to the EIA.
Those realities have certainly been reflected in the stock and fortunes of U.S. coal producing companies. Bankruptcy has already been declared by Patriot Coal, Alpha Natural Resources, and Arch Coal and, any day now if reports are true, the country’s largest producer, Peabody Energy (BTU), will be following suit. The once proud, dominant industry seems to be in terminal decline. Whether you view that as a good or bad thing depends on your political outlook and proximity to the industry, but from a trader’s perspective, the question is does it create any opportunities?
My immediate, logical reaction to that was no. The decline and fall has been so rapid that there have been no winners. The fact is, though, that coal is not disappearing completely any time soon. If you look at most of the bankruptcies they are, at least partly, caused by a rush to borrow and expand a few years ago when coal was in better shape. The debt acquired at that time, rather than actual operational losses, are what killed the big boys.
The glory days of black gold may be over, but smaller, more focused, less debt laden companies can still make money. Hallador Energy (HNRG), for example has not posted a losing quarter since 2008. Back a few years ago, when coal prices were high, Hallador resisted the temptation to borrow heavily and expand into coal. Rather, they reinvested some profit in returning to their roots in oil and gas E&P. Obviously, to some extent that was jumping out of the frying pan into the fire, but from a longer term perspective it may look smart; certainly smarter than doubling down on coal and piling up debt to do so.
While bankruptcy among Hallador’s competitors doesn’t mean that those firms will cease production overnight, the actual process does mean that some assets will need to be liquidated. There will be unmet demand for several years that Hallador will be in a position to fill. That may be enough to give the stock a short term boost at least.
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I should stress that HNRG is not a “buy and hold” kind of stock. If you buy at current levels of around $4.75 you would not be looking for a return to the $14+ valuation of just a couple of years ago. A few positive words from the company and a pop in U.S. coal prices as the effects of the bankruptcy of the two largest producers are felt, however, could easily push the stock up to around $8.
I must confess, when I started digging around in coal stocks, at the request of an Energy Trader Team member, I didn’t expect to find anything worth buying. A somewhat prudent past and a knack for squeezing profit out of even the most difficult times, however, put Hallador in a position to actually benefit from the industries problems in the short to medium term, and as such it may be one bright spot in the desolate landscape of coal.
