David M. Khani, CFA
FBR Capital Markets
Heading into 2010, we continue to be optimistic on the coal space in general and believe that most companies under our coverage should have improved operational and financial performance supported by improving macro trends and increased global trade.
The key tenets of our coal investment thesis in 2010 are: (a) strong metallurgical coal demand; (b) robust export outlook; (c) continued resurgence of steam demand due to colder-than-normal winter; and (d) regulations will maintain an overhang on supply and potentially on demand, which is modestly slowing after a strong pace earlier. We are still cautious on the broader market, looking for a pullback and then the opportunity to be more aggressive on the smaller names.
We remain buyers of the larger companies (Peabody Energy, Consol Energy, Alpha Natural Resources, Arch Coal and Massey Energy) and would prefer to buy on a pullback given the recent run in 4Q09 and the first few weeks in January.
We believe the group has 20% upside after we increased our price targets by about 19%, but we expect that if strong weather continues and inventory declines further strengthen, our steam coal price could prove conservative.
Natural Resources Partners L.P. reported strong 4Q09 earnings per unit of $0.39, higher than the FBR estimates of $0.31 and consensus of $0.26, primarily driven by higher revenues (particularly non-coal royalty) and larger share of metallurgical production.
The stock currently trades with a yield of 8.7% and offers coal investors an alternative way to invest in the coal space through a yield-based investment.
Shneur Z. Gershuni, CFA
Year-end 2009 coal stockpiles at U.S. electric utilities closed at 189.8mm tons, breaking back below 200mm tons with an impressive 6.7% drop. These levels translate into 74 days of coal burn based on trailing 12-month demand, relative to the five-year average December inventory days of 47.
For the first time since August '09, inventories showed their first decline as a result of strong consumption growth further assisted by production cuts. Both economic activity and cold weather helped drive an improvement in generation.
Since September '09, inventory has steadily approached normal levels of inventory days, as indicated by steadily declining days of inventory relative to the 5-year average. December proved to be a strong month in continuing this trend with inventory levels 58% above average, the lowest level since June '09.
Penn Virginia Resource Partners (Buy) realized 4Q09 adjusted EPU of $0.49, above both our $0.32 estimate and the Street mean of $0.30. Results surpassed our estimates due to higher than expected coal volumes, complemented by higher than expected coal royalty per ton. Lower than expected natural gas volumes were a partial offset (resulting from record storage levels).
We are lifting our dividend discount model-derived price target to $25 from $23.
James M. Rollyson
Alliance Resource Partners reported 4Q09 EPU of $0.70, in line with our estimate and slightly higher than the consensus estimate of $0.66.
For 4Q, Alliance declared a quarterly cash distribution of $0.775 per unit (an annualized rate of $3.10 per unit), a 2.0% increase over 3Q09.
Alliance plans to sell 30.3-31 million tons of coal in 2010, up 21-24% from the 24.98 million tons sold in 2009. The expected increased sales will be primarily driven by ramp up in production from the new River View mine.
The confluence of increased volumes and improved pricing realizations could translate into revenue (excluding transportation revenues) growth of 24-30% in 2010 according to management. Specifically, Alliance is anticipating 2010 revenues of $1.47 billion-$1.55 billion.