Coal Rebound Drives Energy Stocks Higher


Stock markets have fluctuated today after St. Louis Federal Reserve President James Bullard said there's no rush to end quantitative easing. That means more easy money for banks and corporate America; this normally sends stocks higher, but the reaction has been mixed today. Late in trading, the Dow Jones Industrial Average is up just 0.1%, while the Nasdaq Composite Index and S&P500 are both up about 0.3%. Energy stocks have slowly gained steam, helped by the struggling coal industry.

Coal stocks are up across the board as investors bet on an improvement in the space. Alpha Natural Resources has risen 10% today, Arch Coal is up 9%, and Peabody Energy has gained 4%. The pop is based on hope that the industry will continue to cut costs, potentially increasing profitability after years of fighting renewables and natural gas.

Last week, Alpha Natural Resources announced it was cutting 230 positions and lowering capital expenditures. The company's revenue fell 27% last quarter, continuing a string of weak reports from the industry. Revenue fell 18.9% and 12.6% at Arch Coal and Peabody Energy, respectively, so the struggles are widespread.

Coal miners are dealing with lower demand in the U.S. because of low natural-gas prices, and even metallurgical-coal demand from China is lower than many had expected. That has killed profits and even put competitor Patriot Coal out of business.

ANR Net Income (TTM) Chart
ANR Net Income (TTM) Chart

ANR Net Income (TTM) data by YCharts.

The only response to falling revenue is to lower capacity and cut costs. If the industry lowers capacity enough, it may bring up prices and bring back profitability. That's the hope today, especially after Arch Coal said its contract prices for next year are up from this year.

It's a long road back for coal companies, and I'd be leery of buying because companies are cutting costs. They're cutting costs to bolster declining revenue, not just to expand margins. These are desperate acts by desperate companies, and that's not the best way to play the energy industry right now.

Energy stocks on the right side of the industry
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Originally published