Coal may have gotten some life after the price of natural gas surged in the cold winter months. Unfortunately, not everyone thinks that the coal sector’s long-term prospects are rising. Merrill Lynch has lowered its price targets and earnings estimates on many coal sector players as the falling marginal costs will depress coal prices.

The Merrill Lynch report slashed some price targets on key coal stocks to the point that one Underperform rating sounded like a “Screaming Sell” rating. The firm said that met coal has defied conventional wisdom, with prices sinking through marginal costs of production and struggling to find a floor.

Its lower estimates reflect falling costs and a view that miners will continue to resist cutting output, and an expectation of depressed fundamentals over the next several years. The firm said:

The industry can continue to be characterized by oversupply, falling marginal costs, growing substitutes, and a reluctance among miners to shut capacity given high barriers to exit. Our new 2014E benchmark hard coking coal (HCC) price forecast falls to $132/mt from $153 and 2015E to $145/mt from $160, below estimated consensus of $154/t for 2014E and $159/t for 2015E. Absent a weather-induced shortfall or significant capacity cuts, we expect benchmark HCC to range from $130-150/mt over the next several years based on an estimated marginal cost of production of $140/mt.

Walter Energy Inc. (NYSE: WLT) was maintained as Underperform, but the price target was slashed to $2 from $8 for its stock, versus a $9.09 closing price. Loss estimates were widened out even worse for 2014 and 2015, with Walter now expected to lose $6.30 per share (versus $3.30 prior) in 2014 and $4.25 per share (versus -$2.15 prior) for 2015. The team said, “Walter could face a mounting liquidity problem over the next 12 to 24 months on our price deck. Our high yield counterpart detailed concerns in his initiation: Stuck Between a Rock and Hard Coking Coal.” Walter shares were down a whopping 14% to $7.81 on heavy trading volume of almost 10 million shares after about two hours of trading.

Alpha Natural Resources Inc. (NYSE: ANR) was maintained as Underperform and its price target was cut to $3 from $4 (versus a $4.45 closing price). Alpha Natural shares were down 3.4% at $4.30 in late morning trading, versus a 52-week range of $4.19 to $8.64.

Arch Coal Inc. (NYSE: ACI) saw its rating maintained as Underperform as well, with the price objective cut to $2.50 from $3.00 (versus a $4.35 close). Its earnings estimates were lowered to -$1.50 from -$1.40 per share in 2014 and maintained at -$1.50 per share in 2015. Arch Coal shares were down almost 2% at $4.27, against a 52-week range of $3.47 to $5.82. Arch Coal was one of our own nine stocks that could double in 2014, a wild card position that has not yet changed.

CONSOL Energy Inc. (NYSE: CNX) was the only coal stock maintained as Buy by Merrill Lynch, with a $43 price target (versus a $40.03 close), but even it saw its earnings estimates lowered. Earnings estimates were lowered to $1.10 for 2014 (versus $1.30 prior) and lowered to $2.20 per share for 2015 (versus $2.80 prior). CONSOL earnings estimates were affected less as lower met coal prices were offset by a greater dependence on the gas side of its business in future years.

Peabody Energy Corp. (NYSE: BTU) was maintained as Neutral and its price target was cut to $18 from $19.

More coal in coal miners’ Christmas stockings.

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