Zacks Coal Industrial stocks, after a recovery in 2022, are once again suffering from the decline in the use of coal in thermal power plants in the United States. In 2023, coal demand will be negatively affected by the planned decommissioning of coal units and the use of more renewable sources for electricity generation. The ongoing energy transition, with utilities steadily phasing out coal-fired power stations, will have a negative impact on the coal industry. On the other hand, the ongoing conflict between Russia and Ukraine is creating new demand from coal-importing countries. Therefore, coal exports from the United States are expected to improve in 2023 from year-ago levels.
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Despite a decline in coal production, improving export volumes and stable coal production are likely to improve the outlook for coal supplies Peabody energy BTU. Other coal deposits and CONSOL energy CEIX and SunCoke energy High quality SXC production volumes are expected to increase during this difficult phase of the coal industry.
About the industry
The Zacks Coal industry includes companies involved in the discovery and mining of coal. Coal is extracted via the above-ground or underground method. The raw material is valued for its energy content and is used worldwide to generate electricity and manufacture steel and cement. According to the U.S. Energy Information Administration (“EIA”) report, current estimated recoverable coal reserves in the U.S. are approximately 252 billion short tons, of which approximately 58% is underground mineable coal. Given current production rates, coal reserves are likely to last for many years. Five states in the United States contribute nearly 70% of annual production and 60% of coal production from open-pit mining. According to EIA, demand for coal will decline due to the use of more renewable energy sources and a gradual closure of coal-fired power stations, harming the coal industry’s prospects.
3 trends that are likely to impact the coal industry
US coal production is declining: According to the EIA’s projection, coal production in the United States is expected to decline in 2023 and 2024, after improving in the previous two years. EIA forecasts that U.S. coal production will decline 2% annually to approximately 583 million short tons (MMst) in 2023 and register a much steeper decline of 20% to 464 MMst in 2024 due to expected reductions in coal use in electricity production . This would hurt coal operators as they face an uphill battle against other energy sources.
Despite its reliability, emissions policies will hurt the coal industryThe improvement in coal demand is short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly reduce coal demand from the US electricity space. According to the EIA, electricity generation from coal would fall from 20% in 2022 to 16% in 2023 and fall further to 15% in 2024. Unless utilities invest heavily in pollution control measures to reduce emissions from power plants, it will domestic coal consumption declines. drop drastically. Coal industry operators should brace for challenges as several electricity companies have decided to become carbon neutral by 2050 and completely reduce coal consumption. Despite the emissions, coal resources are still relevant because the raw material is a reliable energy source and guarantees 24×7 electricity production from the generating units.
Coal benefits from rising exports: Despite an expected decline in coal production volumes, coal operators in the United States can benefit from the expected increase in coal export volumes. Demand for coal is expected to improve due to its favorable pricing compared to other energy sources. Coal is still a viable energy option for many crucial industries around the world. According to the EIA, coal export volumes could increase by 14.4% to 98.4 million tons in 2023 and by 6.7% more to 105 million tons in 2024. The World Steel Association predicts a recovery in global steel production, which in 2023 will increase by 2.3% to 1,822.3 million tons. increased by 1.7% to 1,854 million tons in 2024. Steel production requires a lot of high-quality coal and almost 70% of global steel production depends on coal. With the continued recovery of steel production, coal exports are expected to pick up and improve in the long term.
Zacks industry rank indicates a bleak outlook
The Zacks Coal industry is a group of seven stocks within the broader Zacks Oil and energy sector. The industry currently has a Zacks Industry Rank #222, putting it in the bottom 12% of the 252 Zacks industries.
That of the group Zacks Industry Ranking, which is essentially the average of the Zacks Rank of all member stocks, indicates lackluster near-term performance. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a more than 2-to-1 margin.
The industry’s position in the bottom 50% of Zacks-ranked industries is a result of the negative earnings outlook for its constituent companies as a whole. Looking at the overall earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since January 31, 2023, the industry’s 2023 earnings estimates have fallen 27.8%.
Before we present a few coal stocks you might want to keep an eye on, let’s take a look at the sector’s recent stock market performance and valuation picture.
Industry performs worse than S&P 500 and Sector
The Zacks Coal sector has underperformed the Zacks S&P 500 Composite sector and the Zacks Oil and Gas sector over the past six months.
Coal industry stocks are up 9.7%, compared to the Zacks Oil-Energy sector’s growth of 14.9%. The Zacks S&P 500 composite is up 13.2% in the same time frame.
Six-month price performance
Current valuation of the coal industry
Because coal companies have a lot of debt on their balance sheets, it makes sense to value them based on the EV/EBITDA ratio (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization).
The sector is currently trading at a trailing 12-month EV/EBITDA of 2.92x, compared to the Zacks S&P 500 composite’s 13.29x and the sector’s 3.54x.
Over the past five years, the sector has traded as high as 7.6x, as low as 2.01x, and at the median of 4.75x.
Enterprise value/EBITDA (EV/EBITDA) ratio versus S&P 500
Enterprise value/EBITDA (EV/EBITDA) versus sector ratio
Three coal industry stocks to watch closely
SunCoke energy: SunCoke Energy, based in Lisle, Illinois, is a commodity processing and handling company serving steel and energy customers, with its primary activities being coke production and logistics. With an annual production capacity of 5.9 million tons, the country is poised to benefit from rising coal exports and increasing demand for coal from the steel industry. The company plans to invest $95 million in 2023 to expand its operations. The Zacks Consensus Estimate for 2023 earnings has risen 1.3% over the past 60 days. The company’s current dividend yield is 4.12%. The stock is up 9.7% over the past three months, compared to the industry’s rally of 21.6%.
SunCoke Energy has a Zacks Rank #2 (Buy).
Price and consensus: SXC
Peabody energy: St. Louis, MO-based Peabody Energy is involved in coal mining and has thermal and metallurgical operations. In 2022, almost 28% of the company’s revenue came from five customers with whom it still has 16 coal supply agreements (excluding trade and broker transactions) expiring at various periods from 2023 to 2025. This ensures a steady stream of income. The Zacks Consensus Estimate for Peabody Energy’s third- and fourth-quarter 2023 earnings have risen 8.8% and 9.9%, respectively, over the past 60 days. The stock is up 16.8% in the past three months. Peabody Energy currently carries a Zacks Rank #3 (Hold).
Price and consensus: BTU
CONSOL energy: Canonsburg, PA-based CONSOL Energy, with a Zacks Rank of 3, produces and exports bituminous thermal coal. The company owns and operates the Pennsylvania Mining Complex and the Baltimore Marine Terminal, and manages more than 1 billion tons of undeveloped reserves. The company consistently operates multiple mines to meet increasing demand.
The Zacks Consensus Estimate for 2023 revenue and earnings suggests year-over-year upside of 57.8% and 19.3%, respectively. The stock is up 49.6% in the past three months.
Price and consensus: CEIX
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