The past few years have been tough, to say the least, on U.S. coal producers. The SNL Coal Stock Index is down 82 percent since 2010. U.S. coal producer Alpha Natural Resources just the other day was delisted from the New York Stock Exchange and filed for Chapter 11 protection. Walter Energy has declared bankruptcy and Peabody—in its latest filings—reports net second quarter losses of $1.05 billion on an 8 percent decline in total coal production and a 15 percent decline in revenue.
Some analysts and investors wonder whether this trend will last. Is the malaise temporary? Is it perhaps just a normal part of commodity-markets volatility? Or are there fundamental shifts at work and is this a spiral that will continue unabated?
More-diversified producers, like CONSOL Energy, whose natural gas holdings have offset losses associated with its coal assets, may stand a better chance at long-term viability than a pure-play company like Arch Coal, which could survive by restructuring its debt. Clues as to who the winners and losers can be can be found in reliable market data and in the corporate disclosures filed by law periodically with the Securities and Exchange Commission. Lately, unfortunately, transparent SEC disclosures from U.S. coal producers seem harder than ever to come by.
In the second quarter of this year alone, the SEC has been notified twice of omissions and potentially false and misleading disclosures in SEC filings that ultimately understate risks to investors.
In April, CONSOL filed an S-1 prospectus for the initial public offering of common units of stock in CNX Coal Resources, its master-limited partnership. CNX was engineered as a separate entity dedicated to running—and taking on the risk— of CONSOL Energy’s Pennsylvania coal-mining complex, which includes the Bailey, Enlow Fork and Harvey mines. In June, lawyers from Greenpeace alerted the SEC that CONSOL’s S-1 had overstated the company’s growth from overseas exports overseas. The Greenpeace filing included an IEEFA memo analyzing the over-optimistic projections by CONSOL. We posted details a few weeks ago with a bulletin under the heading “SEC Warned that Consol Coal IPO Overstates Coal Demand with ‘Incomplete and Misleading Disclosures.’”
CONSOL had also understated the influence from competition, downward price pressures, declining valuation of coal mines and oversupply in the market. The Greenpeace letter pointed out that if the filings weren’t amended to reflect the truth, CONSOL could be cited for securities violations for omitting material information and for making misleading statements to investors. A few weeks later, CONSOL revised its public statement on the offering and dropped the IPO price to $15 from its initial $19-21.
In a separate case, Travis Ritchie, a Sierra Club staff lawyer, alerted the SEC that the Form S-1 filed in June by Bowie Resource Partners for an IPO might also be misleading. Ritchie cited several instances in which Bowie had failed to disclose risks around pending contractual arrangements and legal challenges to future operations that could have a material impact on investors. Ritchie’s letter further suggested that Bowie had overstated the potential growth of seaborne thermal coal markets and that it had failed to identify the risks associated with export capacity at California ports.
THE U.S. COAL SECTOR HAS CHANGED DRAMATICALLY AND IN A RELATIVELY SHORT PERIOD OF TIME, and some industry analysis has simply not kept up. Harsh new realities are reducing global demand growth and revenue projections for coal producers, and investors should be wary especially of coal producers that rely on, say, 2013 data around growth in India and China.
Industry outlooks rooted in data from as recently as a year or two ago fail to capture the true impact of rising competition and oversupply, the core realities underlying more current market data.
These are highly uncertain times for the coal industry. The SEC can do a better job of protecting investors by better scrutinizing coal-company filings.
Lisa Anne Hamilton is an IEEFA regulatory consultant.