Taylor Kuykendall in SNL:
Despite near-term improvements in the U.S. coal sector, getting investors excited about the industry may still prove a tough sell.
“I don’t necessarily think we are ever going to get back to a situation where we’re going to have an investment-grade coal company again,” Chiza Vitta, an analyst with S&P Global Ratings, said in a recent interview. “For coal, it’s a mixed bag. We’re still working through the aftereffects of the bankruptcies of the largest companies.”
The recent wave of bankruptcies has produced a somewhat ironic effect, Vitta said. The companies that succumbed to bankruptcy are now among the strongest coal companies in the sector. Meanwhile, a lot of companies that managed to stay out of bankruptcy now face competitors that are both large and lean.
After a vast restructuring of the sector, Vitta described three types of major coal companies: restructured companies with clean balance sheets, companies that weathered extreme market pressures without turning to bankruptcy and new players like Warrior Met Coal Inc. and Ramaco Resources Inc. that he said are largely structured to take advantage of recent improvements in metallurgical coal markets.
Many of the top coal companies received above-average credit health panel scores in a recent review of S&P Capital IQ’s assessment of creditworthiness as measured against a unique group of industry peers. Arch Coal Inc. and Peabody Energy Corp.both scored above average following recent bankruptcy reorganizations, while Cloud Peak Energy Inc., a pure-play Powder River Basin coal producer, also scored above average on operational, solvency and liquidity measures despite not resorting to a bankruptcy court reorganization. The methodology for determining a relative credit health score is here.
“Some of the companies that were more or relatively conservative … they are now continuing to be very challenged because they have bruises to show for surviving the downturn,” Vitta said.
The three coal companies that scored in the bottom quartile of their peers according to S&P Capital IQ’s credit health panel assessment, comprising Westmoreland Coal Co., Foresight Energy LP and Rhino Resource Partners LP, all weathered the sector downturn without a bankruptcy filing. Valuations on Westmoreland have been under stress recently due to balance sheet concerns, lower natural gas prices and weak coal projections.