Pullback in US coal stocks – is it an entry point?

And what I’d buy…

When I joined Matt in writing for TCT, I mentioned in my first post that I expected Atlantic Basin coal prices to experience a “modest rise over the next 12-24 months, with limited downside risks.” Most of that upside potential was due to a forecast for colder-than-normal weather in Europe and because Atlantic Basin natural gas markets were looking tighter than most people thought at the time. And in another post, I mentioned that we should watch TTF gas and API2 coal prices because that would set the netback pricing for some US coals and, as such, it ends up impacting US coal equities prices, especially in the short term.

Well, TTF and API2 prices have pretty reliably been driving the US coal equities prices, so that call has proven true. The major exception being that Peabody shares were driven more by the reaction to the company’s Anglo acquisition, about which Matt wrote a great article. In the chart below, you can see the API2 current month contract (ATWZ2024) correlating very well with CEIX/ARCH share prices, while BTU is an outlier. ARLP shares were supported by a rise in US gas and power prices.

HNRG was another outlier as it’s now trading on a different fundamental story than the other US coal equities. As I wrote a couple weeks ago, the fundamental story for HNRG is a good one, even though the company needed to work out some strategic kinks and do some financial cleanup to smooth out earnings and cash flow volatility.

But I’ve been disappointed in the upside in Atlantic Basin coal prices that I wrote about at the end of September. European natural gas prices did rise briefly to EUR49/MWh (over $15/MMBtu) at the beginning of December as Europe was hit with a period called the Dunkelflaute – “the dark doldrums.” That period of low solar irradiance and low wind caused renewables generation to drop and tightened fossil fuel markets. Coal prices inched up alongside the rise in TTF gas prices, with front month API2 prices eclipsing $125/metric tonne.

Since the end of Dunkelflaute, however, both gas and coal prices have fallen off. TTF natural gas prices have dropped towards the EUR41/MWh this week. That’s not actually a huge change on a m/m basis, as the chart below shows, but it represents a ~15% drop from recent highs. The market is reacting to the end of Dunkelflaute and a rebound in renewables generation.

API 2 coal prices are now down near $110/metric tonne across much of the next year’s forward curve, down over $10/mt in a few weeks, which hurts. Below are the normal TCT thermal coal price update charts as we haven’t posted those in a few days. Atlantic and Pacific Basin prices are down pretty much across the board.

In the last week or so, it seems that there’s now a lot less concern about buying replacement gas and coal cargoes than there was in late November and early December, but I do feel that the recent leg down could reverse course towards the end of the northern hemisphere winter.

My first argument for a rebound is that natural gas markets are still pretty tight. Current European gas storage levels are about 10% lower y/y (roughly 10 bcm). Winter EU gas withdrawals have been running at the quickest pace since the winter of 2016-2017. European gas storage levels could end the winter ~25% or more below last year (15-20bcm lower y/y ), which may disrupt summer plans for reinjections into storage, driving up prices. BofA is calling for spikes in the TTF prices next year of up to 70/MWh. That would equate to gas prices of just under $22/MMBtu, which would definitely put coal gen in the money!

And it does seem like API2 prices have recently found a floor, which could mean a good entry point for US coal equities. This week, the fall in coal prices has slowed and is holding around the $110-111/mt level, even as the broader European energy market declined and gas prices fell. Argus also reported that physical coal prices moved mostly sideways given limited interest in January deliveries, but haven’t fallen in a few days.

So, for the good fundamental US equities plays, now may be a good time to pick up some shares. As you know, I own and like CEIX, which has been operating very well ahead of its highly likely combination with ARCH by Q1 2025. As a US export player, it’s one of the stocks that I’d buy on the thesis that API2 prices are done declining and could rebound next year alongside gas prices. (Even though I’ve written before that most of CEIX’s export tons are priced off indexes besides API2). But US coal stocks will react favorably to any rise in the API2 price as they have over the last couple months. Furthermore, with FCF yield of 10%, CEIX is still an excellent longer-term value play. The combination with ARCH takes a little wind out of the sales of CEIX, but the upshot of that deal is still a large coal cash machine at an attractive valuation.

We haven’t written too much about ARLP recently, but that’s another potential buy here after the pullback. It’s got a well-run domestic coal business, with upside exposure to the export markets (though ARLP does often fail to capitalize on export opportunities), plus upside exposure to higher US nat gas prices and US coal plants that will likely stay online longer than expected. With Henry Hub gas prices up over the last month and ARLP shares flat, I’m looking for an entry point. I’ll get out more ARLP coverage next week.

-JA