Cloud Peak Energy's cost-cutting, production cuts and sole focus on thermal coal mining in the Powder River Basin give the company a better chance of surviving the ongoing downturn, said an equity analyst Thursday.
The company, which reported fourth quarter earnings late Wednesday, made its last federal lease payment during the quarter and has also taken steps to trim its take-or-pay commitments related to its export business.
"The stronger-than-expected operating results in 4Q15 and the firm's outlook for positive cash generation in 2016 provide supportive data points about the firm's ability to survive the downturn, in our view," wrote Stifel equity analyst Paul Forward in a research note.
The company has also trimmed production in light of weak demand. Cloud Peak CEO Colin Marshall said in Wednesday's earnings call that he anticipates 2016 production will total roughly 67 million st compared with 96 million st in 2011.
"That's a significant reduction that has been going on," Marshall said. "And I think if you look at the reductions that Peabody [Energy] is talking about ... then there are significant reductions to the PRB coming."
Peabody executives, in the company's fourth quarter earnings call on February 11, said they would trim production of all uncommitted tons in 2016, leaving them with a fully-priced sales PRB portfolio of 116 million st. The company produced 136 million st in 2015, according to Mine Safety and Health Administration data.
"I think it's not clear where the PRB demand will stabilize, although we've got to be a lot closer to it than we were a year or two ago," said Marshall. "The other thing I keep reminding myself is that whilst demand's dropping, it's very easy to feel like it is going to zero. It's obviously not, and certainly not for the PRB. There's going to be a lot of coal burnt in America in the future."
Marshall said that even were the Clean Power Plan to take effect, coal would still generate roughly 25% of the nation's electricity, and "that's actually going to still be quite a lot of coal."
"I'm optimistic that the cuts that are going on now will actually bring us to that right-sizing before too long and then we'll be able to have a more stable, sustainable business," said Marshall.
Coal demand could go up with a hot summer, but Marshall said it will draw down high stockpiles rather than spur production increases.
"We expect 2016 to be a year of inventory destocking at US coal power plants, leaving room, in our view, for surviving coal producers to participate in some form of price recovery as utility purchasing for 2017 restarts," wrote Forward.
In terms of pricing, Marshall said Cloud Peak has 65 million st contracted for 2016, of which 64 million st are at a fixed price of $12.71/st.
He added the company has 37 million st committed in 2017 at a weighted average price of $12.59/st.
"While the prices were far from desirable, the level of contracting may indicate initial signs of stability in domestic demand," said Marshall. "Only when demand stabilizes will it be possible for production to be right-sized and a sustainable coal industry reestablished, albeit at a significantly reduced production levels."
While Peabody has not filed for bankruptcy, the company carries a significant amount of debt. Both Alpha Natural Resources and Arch Coal, who are also PRB producers, have filed for bankruptcy protection.
