Merrill Lynch Gets Nasty Toward Coal Stocks

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.