Slumping coal market becomes a ‘wild card’ for investors

By Benjamin Hulac | 07/21/2015 08:39 AM EDT

Natural gas made history by surpassing coal as the top U.S. electric energy source in April. Now the market damage begins to flow in through earnings reports.

Natural gas made history by surpassing coal as the top U.S. electric energy source in April. Now the market damage begins to flow in through earnings reports.

In 2010, coal yielded 45 percent of U.S. electricity (ClimateWire, July 15). Now the country has moved into a different economic world where, in April, natural gas provided 31 percent of America’s electricity, coal combustion generated 30 percent and nuclear stations contributed 20 percent of the nationwide mix, while renewables and others made up the difference.

First glimmers of the change appear in second-quarter earnings for railroads and investments firms. Michael Ward, CEO and chairman of CSX Corp., the railroad and intermodal transportation firm, lowered expectations for the company’s coal volumes in the coming months, telling analysts last week that CSX’s coal unit dropped $100 million in revenue in the second quarter from the year before.


Citing a coal glut and natural gas prices south of $3, the company, which operates along the Eastern Seaboard, projected a roughly 15 percent drop in domestic coal volume for the third quarter and 10 percent less volume for 2015 compared to 2014.

"I think coal is the wild card," said Fredrik Eliasson, the CSX chief financial officer, last week, and business with the commodity "depends on how massive will this coal headwind be in the second half" of the year.

In its quarterly filing, Kansas City Southern, a peer company to CSX, reported its energy unit — which moves fracking sands, crude oil, petroleum and, of course, coal destined for utilities — saw loses of 46 and 31 percent for the second quarter and the first two quarters, respectively, compared with the same periods last year.

"Our utility coal business will improve primarily because it simply can’t get any worse than it was in the first half of the year," Pat Ottensmeyer, the company president, told analysts Friday.

Norfolk Southern Corp., another train operator, which hasn’t announced its second quarter results, saw a 16 percent drop in coal revenue in the first three months of the year. The company pointed to foreign exchange hurdles from the strong U.S. dollar, lower exports and the "impact of new environmental regulations [that] reduced coal burn for electrical generation."

Burlington Northern Santa Fe LLC, more commonly known as BNSF, also has yet to report but has shipped more coal this year than it had at the same point last year, according to an internal report, while petroleum has dropped 4 percent versus 2014. A spokeswoman declined to forecast the firm’s outlook on coal shipment volume.

Desperate moves after dismal performance

Of those Wall Street firms that have reported, BlackRock Inc., its largest asset manager, said in regulatory filings it trimmed holdings in Alpha Natural Resources Inc., which was delisted from the New York Stock Exchange last week, and Walter Energy Inc., which also suffered a stock blow last week when it filed for bankruptcy protection (EnergyWire, July 17).

The multitrillion-dollar manager also cut its position in Arch Coal Inc. last week to about 2 percent of the coal firm’s shares, down from almost 9 percent earlier this year.

Coal share prices have plunged this year, even compared to the much-depressed oil sector, though both have been laggards against the broader markets. (The Standard & Poor’s 500 index is up a little more than 3 percent since Jan. 1, and the NASDAQ exchange has climbed more than 10 percent during that window.)

The Dow Jones coal sector has lost 56 percent in value year to date and 84 percent in the past five years — the worst performance of any industry or subsector that Dow Jones measures. The overarching oil and gas industry is down 9 percent on the year but up 37 percent in the past five years.

China, for years the global engine of coal demand, has slowed its appetite, importing almost 40 percent less — 37.5 percent, precisely — in the first half of the year, according to Chinese customs data.

Last year marked the first decline in coal use and production in China, the world’s largest emitter and second-largest economy, in 14 years.

Arch, in the crosshairs of being delisted from the NYSE, announced a 1-to-10 stock split yesterday, a technique often used to stay publicly listed on a premier stock exchange. The action will consolidate the firm’s roughly 213 million shares to 21.3 million.

Rhino Resource Partners LP also made news yesterday. The Lexington, Ky.-based coal company announced it would suspend its second-quarter dividend.

"We are taking every step possible to secure the long-term value of Rhino," said Joe Funk, the company’s CEO and president. The company’s board, he said, will consider reinstating the dividend "in future periods if coal market conditions improve."