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

Apple Inc. (NASDAQ: AAPL) Reiterated Buy and Raised Target to $770 from $730 at BofA/ML.

Celgene Corporation (NASDAQ: CELG) Cut to Hold at Auriga.

Cloud Peak Energy Inc. (NYSE: CLD) Cut to Neutral at Credit Suisse.

CONSOL Energy Inc. (NYSE: CNX) Cut to Neutral at Credit Suisse.

Dril-Quip, Inc. (NYSE: DRQ) named as Bear of the Day at Zacks.

Edison International (NYSE: EIX) Raised to Outperform at Wells Fargo.

Nokia Corporation (NYSE: NOK) Cut to Equal-weight at Barclays.

PPL Corporation (NYSE: PPL) was maintained as Buy but removed from the Conviction Buy List at Goldman Sachs.

Lennar Corporation (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), and Toll Brothers Inc. (NYSE: TOL) were all raised to Buy from Hold at KeyBanc today.

VMware Inc. (NYSE: VMW) Started as Overweight at Piper Jaffray.

If you enjoyed the top analyst upgrades and downgrades, you can join our free email newsletter that includes analyst summaries each morning sent right to your inbox.  We also cover top issues such as IPOs, special financial exclusives, mergers and more. Sign up in the box below.

Your email address

subscribe

terms and conditions

JON C. OGG

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

Arch reported adjusted diluted EPS for the quarter of $0.29, compared with a consensus estimate of $0.32. Eliminating the adjustments, diluted EPS came in at $0.33. Quarterly revenue also fell a bit short at $1.23 billion compared with estimates of $1.3 billion.

The company’s CEO said that Arch is reducing its production volumes in 2012 “to better align with weak generation and coal demand trends.” Here’s what the company had to say about conditions in 2011 and its outlook for 2012:

Coal markets weakened in the fourth quarter of 2011 as abnormally mild weather and muted economic growth caused U.S. power generation to decline slightly for the full year. Domestic coal consumption declined 5 percent in 2011, resulting from the decrease in power generation as well as fuel switching by power producers given decade-low prices for natural gas and abnormally high hydroelectric availability. As a result, coal stockpiles at U.S. generators rose to an estimated 180 million tons by year end, a seasonal build that is above historical norms.

In 2012, Arch currently estimates that domestic coal consumption for power generation could decline by 50 million tons or more from 2011 levels, as mild weather has reduced power demand and the current oversupply in natural gas markets could induce more coal displacement. Given anticipated declines in domestic coal use as well as U.S. generator stockpile builds, Arch believes that coal production and capital spending levels industry-wide are in the process of significant rationalization, which should set the stage for the next market upswing.

Arch shares are down nearly -4.5% in pre-market trading at $15.58 in a 52-week range of $13.09-$36.99.

Paul Ausick

Demand for coal, both the thermal variety used for generating electricity and the metallurgical coal used in steel making, declined in 2011 as coal-fired plants have been shut down in favor of gas-fired plants and demand for steel has dropped.

In the US, gas-fired plants account for about 39% of total generation capacity, but these plants have traditionally been used to meet demand spikes because natural gas was more expensive than coal. With gas prices so low (about $2.49/thousand cubic feet today), coal miners have to lower prices or reduce production or both.

A quick look at coal mining companies’ valuations is enlightening.

Alpha’s share price at around noon today is $23.19 in a 52-week range of $15.49-$61.66. The consensus target price on the stock is $29.50, for a potential upside of 27%.

Patriot’s share price is $9.19 in a 52-week range of $6.92-$27.56. The consensus price target on the stock is $11.50, for a potential upside of 25%.

Peabody’s share price is $38.38 in a 52-week range of $30.60-$73.95. The consensus price target for the stock is $49, for a potential gain of about 28%.

Consol’s share price today is $37.34 in a 52-week range of $30.56-$56.32. The consensus price target is $50, for a potential upside of 34%.

Arch Coal’s share price is $15.39 in a 52-week range of $13.09-$36.99. The consensus price target is $22, for a potential upside of about 43%.

Market Vectors Coal ETF (NYSE: KOL) is down 0.4% at $37.17 and is 52-week trading range is $27.42 to $51.87.

Share price highs for all the coal miners is down by -24% to -64%, with Consol down the least and Patriot down the most. Our pick from among these would have to be Peabody, primarily for its strength overseas. The others are either closing shafts or soon will be.

The boom in shale gas production not only weighs down natural gas prices, but will continue to weigh on coal prices. About the only thing that can help here, is lower natural gas production, and that may be starting to happen.

Paul Ausick

In addition to its struggles with a weak economy, the coal industry is almost continuously fighting rear-guard battles against environmentalists and regulators. The industry, or at least some of its players, have earned the scrutiny following deadly mine explosions and for continuing the widely denounced mining practice known as mountaintop removal. The US Environmental Protection Agency tried to rein in mountaintop removal mining by invoking provisions in the Clean Water Act. In a court ruling yesterday, the industry won a victory over the EPA when the judge ruled that the agency had exceeded its enforcement authority by failing to go through the formal rulemaking process before promulgating the restrictions on mountaintop removal.

The suit was filed by the National Mining Association, an mining industry group that includes large coal miners like Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), Peabody Energy Corp. (NYSE: BTU), Cliffs Natural Resources Inc. (NYSE: CLF), Consol Energy Inc. (NYSE: CNX), and Patriot Coal Corp. (NYSE: PCX). The court ruling is expected to remove restrictions on more than 70 mining permits that were holding up projects in Appalachia.

The EPA pointed out that the ruling is a procedural issue and that it does not affect the agency’s authority under the Clean Water Act. In fact, the EPA released in July its final guidance which replaced the interim guidance that the court ruled on yesterday.

This issue still has some time to go before it is finally played out, and coal miners will continue to struggle, but not because they can’t keep knocking the tops off Appalachian mountains. On Monday, Arch Coal revised its outlook for the 2011 fiscal year from EPS of $1.75-$2.15 to $1.00-$1.40. The company has lost production of metallurgical coal at one of its mines following a roof collapse. Several other miners have had similar problems producing the high-priced coal and that is sending mining companies back to Appalachian mines.

Typically, when production of coal is disrupted, the price of coal rises. That’s not happening this time as Australian shipments of coal are fast making up for the disruption to production following last year’s floods. And then there’s the overall weak economy, which cuts demand for energy even more.

Over the past year, all seven of the companies mentioned here have seen share prices drop from around -5% (Consol) to nearly -60% (Alpha). Whether the coal mining stocks are currently a great value or a looming value trap depends more the pace of recovery in the world’s economy than on winning a pyrrhic victory over the EPA. And today’s share price declines bear that out.

Shares of Arch Coal are down more than -2% at around noon today, at $15.44, in a 52-week range of $13.09-$36.99. Alpha’s shares are off -3.5%, at $18.49, in a 52-week range of $15.49-$68.05. Patriot shares are off more than -7.5%, at $9.28, in a 52-week range of $6.92-$29.20. The Market Vectors Coal ETF (NYSE: KOL) is up 0.3%, at $32.03, in a 52-week range of $27.42-$51.87.

Paul Ausick

If the rumor is true, the deal would be valued at $7.5 billion and it only highlights the value of coal for industry.  Walter Energy produces and exports metallurgical coal for the steel industry and its stock had been faltering considerably of late.  Disappointing earnings and management turmoil have been attributed to much of Walter’s woes so far this year.

What is interesting is that a Bloomberg report this morning quotes a fund manager saying that Anglo American is not a likely bidder.  Go figure.

Elsewhere in more general coal movers, Market Vectors Coal ETF (NYSE: KOL) is up almost 4% at $41.29.  CONSOL Energy Inc. (NYSE: CNX), valued at $10.3 billion, is up 4.6% at $45.62.  Peabody Energy Corp. (NYSE: BTU), valued at $13 billion, is up 4.8% at $47.85.  Alpha Natural Resources, Inc. (NYSE: ANR), valued at $7.3 billion, is up 7.2% at $32.42.

What is interesting is that Walter Energy’s earnings estimates are $10.47 EPS for 2011 and $12.45 EPS.  Coal companies usually trade with a sub-market P/E multiple.  Still, even if things flatten and the estimates in 2012 only match this year’s estimates then Walter trades at about 8.4-times expected earnings.  It pays only 0.6% in dividend yields.

Even after an 18% pop to $88.69 after closing at $74.99 yesterday.  The 52-week trading range is $69.33 to $143.76.  As with all reports and rumors, none are gospel until a deal is formally announced.

JON C. OGG