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Maybe the Coal Market Isn't Dead After All

Image source: Getty Images.

The coal industry has operated under brutal conditions over the past couple of years due to a combination of oversupply and sinking demand. As a result, most of America's biggest coal companies have filed for bankruptcy, leaving investors to wonder if the industry would ever recover from its death spiral. However, while the market may be ready to write the sector's epitaph, the CEOs of the few coal companies left standing think that the worst just might be over.

Turning the corner

During the second quarter, coal producers saw a noticeable improvement in their financial results. Coal MLP Alliance Resource Partners (NASDAQ: ARLP) and its general partner, Alliance Holdings GP (NASDAQ: AHGP), for example, saw a 6.8% increase in their coal sales volumes during the quarter, which drove revenue up 6.4% compared to the first quarter. Those stronger sales, when combined with the company's cost-reduction initiatives, fueled a stunning 74.8% increase in their net income.

Fellow coal producers Foresight Energy (NYSE: FELP) and Cloud Peak Energy (NYSE: CLD) experienced similar turns in in their financial results. Foresight's coal sales volumes spiked 35% compared to the prior quarter, driving a $61 million increase in revenue to $224.1 million. Meanwhile, Cloud Peak CEO Colin Marshall noted that "after very low shipments in April and May, we started to see improved shipments in June." Further, as a result of stable price realizations and reduced costs the company's margin per ton increased.

Better days ahead

None of those producers thought that their second-quarter results were outliers. Instead, each suggested that they signaled the beginning of an improvement in the coal market.

"Assessing the remainder of 2016, we are beginning to see some positive signs in the domestic thermal coal markets," said Joe Craft, the CEO of Alliance Resource Partners and Alliance Holdings GP.

Meanwhile, Colin Marshall of Cloud Peak said that he was "optimistic that this trend [of improved shipments] will continue during the second half of the year."

Driving this optimistic outlook for coal, according to Craft, was the fact that:

Rising natural gas prices and hot summer weather have recently resulted in increased coal burn and inventory reductions at many power plants. Through the end of the year, forecasted weather patterns appear favorable, the forward price curve for natural gas remains positive and additional coal supply reductions are anticipated. We expect these factors will support coal demand in our Illinois Basin and northern Appalachian markets.

More importantly, the company is receiving actual sales to back up that outlook. As Craft noted on the second-quarter conference call:

Buying activity picked up during the 2016 quarter, allowing ARLP's marketing team to further strengthen its contract book by increasing price and volume commitments by approximately 5.2 million tons through 2019. ARLP is now essentially sold out for 2016 based on anticipated production levels and has also secured price and volume commitments for 2017, 2018, and 2019 of 24.3 million tons 15 million tons and 7.9 million tons, respectively. We are anticipating additional buying activity for 2017 and beyond, again in earnest over the next 3 to 4 months.

Cloud Peak, likewise, sees the potential for strong coal sales in the second half of the year. It noted in its earnings release that, "if summer burn is strong, utilities are expected to rebuild their stockpiles in anticipation of winter demand. This scenario creates the potential for strong shipments and increasing sales this fall."

Investor takeaway

The coal market has been atrocious over the past few years. However, the few companies left standing all saw signs during the second quarter that the worst could be in the rear view mirror. Not only did sales increase, but the outlook is improving. While that does not mean that the industry has a bright future, it does suggest that it is not quite dead either.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.