Lower US natural gas inventories in 2017 should translate into higher domestic coal sales and perhaps encourage electric utilities to move off their current "short" coal-buying strategy, Hallador Energy president and CEO Brent Bilsland said Tuesday.
On the heels of a mild winter, what could really help domestic coal pricing, though, is a long, hot summer, Bilsland told analysts during a conference call to discuss his company's fourth quarter and full-year 2016 earnings.
"We expect our customers to burn more coal in 2017 than in 2016," said Bilsland, whose company owns Illinois Basin thermal coal producer Sunrise Coal.
Hallador already has committed coal sales of about 6 million st this year and is confident it will sell another 500,000 st or so in the remaining months of 2017.
Almost all of that coal is expected to come from the Oaktown underground mining complex in Knox County, Indiana. Oaktown's No. 1 and No. 2 continuous mining operations essentially have been merged into a single large mine that produces about 5 million st annually.
At present, Oaktown is running at only 60% capacity, according to Bilsland. Oaktown's cash costs are estimated at $28-$30/st in 2017 and could drop even lower if production picks up.
"We ran the mine a little harder in the fourth quarter and costs dropped to [around] $26/st," he said.
Bilsland spent considerable time talking about the interaction between gas prices and coal demand. Declining gas prices over the past few years -- they reached historic lows of around $2/MMBtu in early 2016 -- have been cited as a key reason for falling coal output, as many utilities switched away from higher-priced coal.
Now, however, "there is a lot less gas to compete against than in years past," Bilsland said, pointing out that US-produced gas is being diverted for uses other than electric generation and is exported to Mexico. "We expect gas inventories to be half above the norm of what they were last year. This is going to create a lot more coal to be burned."
Moreover, gas prices are forecast to be higher in 2017, in excess of $3/MMBtu, compared with an average price of $2.49/MMBtu last year. In general, nevertheless, most utilities still are playing the short game in terms of coal purchase contracts, opting for a year or less.
"Utilities are taking a wait-and-see approach," he said. "They're going to wait to see what the summer heat brings and laying in spot purchases as they get there."
Indeed, such a buying strategy has led to historically short contract positions for Hallador, Bilsland noted.
With declining coal inventories late last year and an increase in exports, he believes utilities may have been poised to enter into longer coal purchase agreements if the winter had cooperated.
But after a seasonably cool December in the Midwest, January and February produced above-average temperatures for the second year in a row.
Utilities "started to get a little more panicky. They know we're in a market that isn't as liquid as it was," Bilsland said. "Playing the short side works until you run out of fuel."
This summer's temperatures, particularly in June and July, are likely to dictate whether coal prices show much upside movement in 2017.
"On pricing, it's going to be weather-dependent," Bilsland said. "When the market moves, it's going to move very quickly. If buyers need to fill 10% of their needs, pricing is going to be flat. If they need to fill 30% of their needs, pricing is going to move fairly dramatically" because of a dearth of domestic coal supply as dozens of producers have closed mines, curtailed operations or gone out of business in recent years.
Bilsland said Hallador has sealed about 80% of its Carlisle underground mine in Sullivan County, Indiana, once its flagship operation.
Still, the company hopes to restart Carlisle at some point, albeit as a smaller, lower-cost operation.
"When we do bring Carlisle back on line," he said, "its cost structure will look a lot better."
Hallador CFO Larry Martin said the company recorded a net loss of $3.8 million in the fourth quarter of 2016 but earned $12.5 million for the entire year.
