Patriot Coal on Friday fielded informal pitches from restructuring advisors, said three sources familiar with the matter. The distressed coal miner aims to retain the professionals in the even[t] the company can’t satisfy its near-term financing needs.

The company failed to syndicate a $625 million bond offering last week after announcing that it lost a key customer. The situation is getting desperate and a bankruptcy filing is a real possibility at this point.

Other coal miners shares are also getting hit hard: Peabody Energy Corp. (NYSE: BTU), which spun-off Patriot in 2007, is down -5%, Arch Coal Inc. (NYSE: ACI) is down -10%, Consol Energy Inc. (NYSE: CNX) is down -3.8%, Alpha Natural Resources Inc. (NYSE: ANR) is down -5.5%, James River Coal Co. (NASDAQ: JRCC) is down -8.4%, Walter Energy Inc. (NYSE: WLT) is down -5.6%, Cloud Peak Energy Inc. (NYSE: CLD) is down -2.8%, and the Market Vectors Coal ETF (AMEX: KOL) is down -2.2%.

The weakness in domestic coal demand has absolutely clubbed the coal miners in the last year or so. Rising natural gas prices have led to some happy talk about coal, but there is nothing but bad news on the horizon for the industry.

Shares of Patriot Coal are down about -45% at $1.84 after posting a new 52-week low of $1.67 earlier today. Peabody also posted a new low of $23.30, as did Arch Coal at $6.84, James River at $3.12, Walter Energy at $48.35, and the Market Vectors ETF at $26.05. And except for Cloud Peak, the others came within pennies of posting new lows.

Paul Ausick

Natural gas producers like Exxon Mobil Corp. (NYSE: XOM), Chesapeake Energy Corp. (NYSE: CHK), and EOG Resources Inc. (NYSE: EOG) have slowed production in an effort to get gas prices to rise. Coal producers like Consol Energy Inc. (NYSE: CNX), Peabody Energy Corp. (NYSE: BTU), Alpha Natural Resources Inc. (NYSE: ANR), and Arch Coal Inc. (NYSE: ACI) have also cut production, but in their case the effort was to reduce costs.

Natural gas inventories remain high, though off by about 13% from their peak in March. Lower injections into storage have helped, as have warmer temperatures in some parts of the country. But temperatures are expected to moderate and the forecast for summer does not include long periods of high temperatures. That means that natural gas inventories will enter the traditional winter drawdown period beginning in October with above average inventories again. Inventories need to drop by more than 500 billion cubic feet by the end of summer or there won’t be any place to put new production. The early estimate for inventory growth this week calls for 67-88 billion cubic feet to be added to already bulging stocks.

As for the coal producers, they could continue to get squeezed at natural gas price below $3.00 because generation plants that have switched to gas won’t want to switch back until they are sure that gas prices are going to remain elevated. Utility companies will drive a hard bargain on coal pricing until it’s clear that gas prices are going to remain high.

The recent modest increase in natural gas prices is not going have much impact coal production unless the price hike gets above about $3/thousand cubic feet and stays there. That does not appear likely at this point.

Paul Ausick

Patriot dropped its price estimate by $25-$20/ton and estimated shipments of 3.9 million of currently priced tons in the remainder of 2012 and just 200,000 currently priced tons in 2013. Pricing on the 2013 shipments is just $122/ton, compared with $145/ton for the rest of 2012.

Shipments of thermal coal used to generate electricity have been hurting coal share prices for nearly a year now as natural gas prices remain very low. But met coal, which is used in steel-making, has fared a little better and met coal producers have had some backstop for the downturn in thermal coal sales. But not after today.

Patriot is dragging the entire coal mining sector down with it. Peabody Energy Corp. (NYSE: BTU) is off -4.4%, Consol Energy Corp. (NYSE: CNX) is off -4.1%, Arch Coal Inc. (NYSE: ACI) is off -4.6%; Alpha Natural Resources Inc. (NYSE: ANR) is off -8.8%, Walter Energy Corp. (NYSE: WLT) is off -6%, James River Coal Corp. (NASDAQ: JRCC) is off -4.3%, and Cloud Peak Energy Corp. (NYSE: CLD) is off -3.2%. And the more met coal a company mines, the worse the story. That’s why Alpha and Walter are down so much further than the others.

Peabody has posted a new 52-week low this morning of $26.72. James River also struck a new annual low of $3.58, and Alpha posted a new low of $11.95.

Patriot, of course, has done even worse. Shares are down -15.4% at $4.09, and the stock’s new 52-week low is $4.08. The prior range was $4.82-$24.99.

Paul Ausick

In its report S&P said:

We expect operating results and credit metrics at U.S.-based Consol Energy Inc. to weaken in 2012 as result of low prices caused by the combination of weather-induced weak utility demand and switching to natural gas from coal, lower met coal prices, and low natural gas prices.

The ratings agency also said it expects the weak performance to last “into 2013.” Lower prices for the company’s metallurgical coal, higher safety-related and labor costs, and low natural gas prices get most of the blame for the lowered outlook. And S&P is also thinking long-term prospects are not so hot either:

[O]ver the next several years, more-stringent environmental regulations for power plants make it less likely that new coal-fired generation plants will be built in the U.S. and could reduce the demand for coal and pressure prices.

No coal company can at this moment claim an investment grade rating on its stock. Cash flow and credit availability (at whatever price) are the keys to survival for at least the next couple of years.

Shares of Consol are down -0.7% at $33.30 in a 52-week range of $29.85-$55.02. Shares of Alpha Natural Resources are down almost -3% at $14.41 in a 52-week range of $13.80-$55.20.

Paul Ausick

The company’s results are far worse than those of either Peabody Energy Co. (NYSE: BTU) or Cloud Peak Energy Inc. (NYSE: CLD), both of which reported a profit. Peabody’s profit came from overseas operations and Cloud Peak’s from shipping its Powder River Basin coal to China. Alpha Natural Resources Incl. (NYSE: ANR) is expected to post an EPS loss of -$0.06 for the first quarter, Patriot Coal Corp. (NYSE: PCX) is forecast to post an EPS loss of -$0.40, and James River Coal Co. (NASDAQ: JRCC) is looking at a loss of -$0.66. Arch, comparatively speaking, didn’t fare too badly.

The company also revised its forecast, cutting full-year sales volume to a range of 136-142.5 million tons, about 10% below 2011 sales at best. Costs are rising due at least partly to lowered volumes. Rising natural gas prices, up from around $2/thousand cubic feet to around $2.30, will help coal miners a little bit, provided that exports grow as predicted and the US has a hot summer.

For the most part coal stocks are rising this morning. Even Arch is up nearly 1% after lowering its quarterly dividend from $0.11 to $0.03. Patriot Coal is up nearly 5% and Cloud Peak is up 3%. What investors are seeing is a bottom surely. But coal mines are deep, dark places that hide as much as they reveal.

Paul Ausick

Operating conditions for domestic producers of thermal coal and, to a lesser extent, metallurgical coal remain very difficult due to a mild winter, natural gas substitution in the U.S., and slowing steel production overseas. In our view, these conditions are likely to decrease demand and hurt contract pricing into 2013.

It is possible to say the same thing about other US coal producers, including Patriot Coal Corp. (NYSE: PCX), James River Coal Corp. (NASDAQ: JRCC), Alpha Natural Resources Inc. (NYSE: ANR), and Peabody Energy Corp. (NYSE: BTU). Credit ratings on all these companies is in junk territory: in late March, James River’s rating from S&P was cut to ‘B-’ and the company remained on CreditWatch with negative implications; James River’s rating is ‘B+’ and it, too, is on negative watch at S&P; Alpha’s rating at Moody’s is ‘Ba2’ and its outlook was revised in February to ‘negative’; and Peabody gets a rating of ‘Ba1’ with a ‘stable’ outlook from Moody’s.

There are those who believe this is a buying opportunity. Analysts at Sterne Agee are pleased with production cuts, particularly at Patriot Coal, and also says that it would “add to positions” in Alpha, Peabody, and James River. The implicit assumption here is that the coal situation won’t deteriorate further.

Arch Coal came with 25 cents of its 52-week low this morning. James River was within 30 cents of its 52-week low and Patriot Coal was within 50 cents. But to believe that this is the bottom is really only a bet on the weather. Steel production is flat, especially in China, and in the US fuel switching to natural gas doesn’t have much further to run but that doesn’t mean that coal will make a comeback. A really hot summer in the US could improve demand for electricity to cool the country’s homes and offices, but that will only be temporary. More far-reaching are limits on carbon emissions that could lead to the shuttering of many more coal-fired generation.

Arch Coal’s shares are down -3% at $9.35 just before noon today, in a 52-week range of $9.05-$35.06.

Paul Ausick

Peabody Energy Corp. (NYSE: BTU), Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), Patriot Coal Co. (NYSE: PCX), James River Coal Co. (NASDAQ: JRCC), and Cloud Peak Energy Inc. (NYSE: CLD) all posted gains of anywhere from 3.5% to more than 8% yesterday. All are giving about half of that back today.

The reason is the worse-than-hoped-for report on China’s GDP growth (our coverage here). The 8.1% growth rate was sharply lower than the 8.9% growth in the fourth quarter of 2011. But investors were hoping for better — and for no apparent reason. The IMF lowered its estimate of China’s 2012 GDP growth to 8.2% earlier this week and the Chinese government itself is targeting growth at just 7.5%. If the government truly means to hit that target, more contraction in the growth rate must be assumed to be coming.

Coupled with declining domestic coal consumption, US coal miners face another quarter — at least — of tough going. Year-to-date rail transportation of coal is down by 200,000 railcars from a year ago and about the only thing that can put demand back on track is hotter-than-expected weather, which would increase the demand for air conditioning.

Yesterday’s bets on coal having hit a bottom were likely premature. Here’s the take from Credit Suisse, cited at nasdaq.com:

We are lowering our 2012 met coal forecast by ~3% (2013 unchanged) and our seaborne thermal coal price by ~10% in both 2012 and 2013. Domestically, we are lowering our U.S. thermal coal price by an average of 11% for 2013.

Share prices for these coal companies are down as much as -80% in the past 12 months, with Cloud Peak down the least at -30%. If the analysts at Credit Suisse are right, there’s still room at the bottom.

Peabody is down nearly -4% today at $28.19 in a 52-week range of $27.11-$68.30.

Arch Coal is down nearly -6.5% at $9.88 in a 52-week range of $9.88-35.06.

Alpha is down more than -3% at $15.57 in a 52-week range of $13.80-$59.20.

James River is down -2.6% at $4.88 in a 52-week range of $4.51-$25.39.

Cloud Peak is down more than -4% at $14.76 in a 52-week range of $14.65-$24.34.

Paul Ausick

Coal prices did not suddenly rise, but there is plenty of belief that they soon will. Analysts at FBR Capital Markets have said that the recent round of fuel-switching from coal to cheaper natural gas is about to end. According to The Wall Street Journal, about 90% of the switchable power generation capacity has already made the change. In order to maintain the high rate of fuel-switching, power plants that currently burn only coal would have to undergo major renovations that would take years — and billions of dollars — to complete.

The other driver appears to be rising demand for US exports of coal. Exports doubled last year to more than 100 million tons, about 10% of US production. But there are some constraints to increasing that number again. New terminals need to be built or existing ones expanded. That’s especially true on the West Coast, with its direct access to Asian markets, particularly China.

But it’s not clear that Chinese demand is going to rise. Reuters reported yesterday that China’s five largest utilities lost a total of $317 million in January as slower economic activity in the country depressed demand for electricity. And part of that problem was the price of coal, which averaged about $121/ton. Because the government controls the price that utilities are allowed to charge for electricity, rising coal prices wreak havoc on profits.

Couple that with today’s report from the International Monetary Fund that it is lowering its forecast for China’s GDP growth in 2012 from 8.4% to 8.2%. The Chinese have themselves forecast GDP growth of just 7.5% for 2012, down from 9.2% in 2011. That hardly seems like an indicator that coal demand will rise in the Middle Kingdom.

If US domestic coal prices rise, the rise is likely to be only moderate. The Central Appalachian coal price (called CAPP) is right around $2.50/million BTUs right now, about 20% higher than natural gas. Say it rises to around $4.50 or so, about where it was last year. At some point near there, converting a power plant to a switchable unit may become cost-competitive. A sure sign to look for will be an announcement from a major utility that it plans to make the switch. That could open the floodgates to new or remodeled gas-burning plants that will stop rising coal prices in their tracks.

And don’t count the US Environmental Protection Agency out of the mix either. The EPA has already proposed stricter emissions rules for new power plants and the rules nearly eliminate the possibility that another coal-fired power plant will ever be built in the US. Rules governing existing plants are still in progress, but these too could be very hard for coal-fired generators to comply with.

But hope rules today. Patriot Coal is up more than 8% at $6.23 in a 52-week range of $5.42-$2712.

Peabody is up about 7% at $29.20 in a 52-week range of $27.11-$68.30.

Arch Coal is up about 6.5% at $10.55 in a 52-week range of $9.88-35.06.

Alpha is up more than 8% at $15.83 in a 52-week range of $13.80-$59.20.

James River is up about 6% at $5.00 in a 52-week range of $4.51-$25.39.

Cloud Peak is up about 3.3% at $15.54 in a 52-week range of $14.65-$24.34.

Paul Ausick

Demand from China, South Korea, Japan, and India rose rapidly last year and coal companies believe this trend will continue. Peabody Energy Corp. (NYSE: BTU), Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), and Cloud Peak Energy Inc. (NYSE: CLD) all experienced export gains.

According to an AP report, Arch Coal believes that US coal exports could more than double to 245 million tons by 2015 if export terminals can be expanded or built to handle the additional load. The US Department of Energy projects a slight decline in coal exports for the next two years, and then slow growth to about 130 million tons by 2030.

The prices for exported coal are high and may rise, but the problem the coal companies face is that only about 10% of mined coal is exported. The US produced 1.1 billion tons of coal in 2011, and 90% was sold domestically. The domestic competition is natural gas, which has been trading at historic lows and now hovers near $2/thousand cubic feet. An energy-equivalent amount of coal is selling for around $2.50/ton, enabling plants capable of fuel-switching to do so.

While getting a premium price for 10% of your product is a good thing, it’s not much help when 90% of your product is being sold at bargain prices.

Expect to hear more about export terminal expansion and environmentalists’ challenges to US coal exports that sound very similar to arguments against the Keystone XL pipeline. The basis of the argument is that pollution somewhere is pollution everywhere — and coal is an easy target.

Paul Ausick

Coal miners James River Coal Corp. (NASDAQ: JRCC), Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), Peabody Energy Co. (NYSE: BTU), Patriot Coal Corp. (NYSE: PCX), and Consol Energy Corp. (NYSE: CNX) are closing mines, cutting production, and in general struggling to keep revenues and profits from sinking.

Warm winter weather, historically low natural gas prices, and fears of an economic slowdown in China have pushed coal stocks down by between about -40% to -80% in the past year. Even coal miners that produce substantial amounts of the more costly metallurgical coal used for steel making have suffered.

Will the market for coal turn around? Certainly summer demand for air conditioning could help. If this summer in the US is, like winter, warmer than usual, demand for coal — and natural gas — will rise and prices along with it. But coal needs to close a gap of about $0.25/million BTUs before it is again equal to the price for natural gas.

Gas producers will help if planned production cuts materialize, but absent hotter weather that may not make enough of a difference. Coal provided the energy for about 42% of US electricity generation in 2011 and the US Energy Information Administration predicts a fall to around 40% in 2012. Natural gas-fired generation is expected to grow from 24.8% of generation in 2011 to 27.1% in 2012.

A hot summer combined with lower natural gas production will be the primary drivers for thermal coal prices in the US in the next six months. Investors wanting to bet on the weather can take a chance on coal, but an equally good bet would be on just about any agricultural commodity. Over the long haul, coal might make a comeback, but that’s betting that environmental issues can be overcome or pushed aside. The future for coal looks blacker all the time.

Paul Ausick