2015 has been a year to forget for coal companies. 2016 doesn't figure to be much better.
Analysts anticipate surplus supply, tepid demand and low natural gas prices will continue to weigh on the industry in the coming year, placing greater strain on companies already groaning beneath the weight of their debts.
UBS termed the 2016 market outlook "black as coal." The bank said it expected utilities' coal consumption to decrease by 30 million tons in 2016, coming on the heels of a 12 percent, or 100 million ton, reduction this year. It gave stocks in Arch Coal, Cloud Peak Energy and Peabody Energy -- the top three producers in the Powder River Basin -- a sell rating.
"We're bearish on 2016," said Matt Preston, who manages North American coal research at Wood Mackenzie, a consultancy. His firm's projections are not as gloomy as its counterparts. Wood Mackenzie expects coal consumption to fall by roughly 20 million tons next year, Preston noted, in part because the company anticipates natural gas prices will rise slightly over the latter half of the year.
The Powder River Basin, in particular, would benefit from a price recovery. Analysts generally reckon miners in northeast Wyoming and southeast Montana can turn a profit when natural gas prices hit $2.50-$2.75 per million British Thermal Units. The national benchmark for gas prices was $2.14 per million BTUs as of Tuesday.
But whether that relief will be enough for coal companies struggling to manage their debts is another matter. Peabody recently sold three mines in Colorado and New Mexico for $358 million. The move was designed to shore up the company's finances, which have declined with the market. However, the selling price indicated coal's weakness. Morningstar estimated the mines' collective worth at between $550 million and $600 million.
Arch Coal is in an even more precarious position. The owner of the Black Thunder Mine near Wright said recently it may file for Chapter 11 protection in the "near term." An increase in gas prices will help the company make money at its Powder River Basin mines, but those gains will likely be offset by losses in Appalachia, Morningstar analyst Kristoffer Inton wrote in a note to investors.
"I think there will be further restructuring, further (mergers and acquisitions)," said Jim Thompson, director of U.S. coal research at the consulting firm IHS Energy. "It's hard to see price improvement through most of next year."
The weak market owes itself in large part to a coal surplus and cheap natural gas. Utilities entered contracts to buy coal in 2014 when gas prices were around $4 per million BTUs. However, many chose to burn gas and sit on their coal stocks when natural gas prices began to plummet this year. Natural gas surpassed coal as the chief source of power generation in April, then again in July and August when high electricity demand usually leads to increased coal burn.
Coal shipments continued in the meantime, resulting in a buildup in coal reserves. UBS estimated utilities' coal stockpiles around 150 million tons at the end of September, or near 2013 levels.
Utilities' coal contracts are now coming to an end, but the oversupply is expected to linger into 2016. Power companies' appetite for gas will most likely continue, meaning coal stocks are unlikely to dwindle by a significant amount, Preston said.
The market trends have been compounded by the regulatory environment, he noted. Utilities are increasingly unlikely to invest in upgrades to coal plants, not to mention new facilities, given federal efforts to reduce carbon dioxide emissions. At the same time, banks are responding to concerns over climate change by cutting credit lines to coal companies.
"I think there is a general trend on the utility side to begin looking at reducing their coal fleets," Preston said. "Any capital you might spend on coal, there is serious thought to redirecting it to something else."