9 Coal Stocks With Upside

NEW YORK (TheStreet) -- At a recent Coaltrans Asia conference in Bali, large coal players revealed that with Japan's economy showing signs of recovery, coal prices may rebound in the second half of the year as producers are geared to scale up operations to cope with the surging demand.

Meanwhile, Indonesian and Australian coal producers are ramping up operations to meet Asia's burgeoning coal demand for power, especially with several thermal power plants coming online in India. An industry expert said at the conference that Japan's thermal coal demand for 2011 has narrowed by only 10 million tons to 110 million tons, based on demand recovery from power plants that were not damaged.

Growing coal demand from China and India, powered by rising electricity demand, is fuelling the Asian coal rush. China is facing its worst power deficit in years and its dependence represents a major portion of the coal demand, while India's electricity demand is seen rising 56% by 2017.

Industry analysts foresee growing overseas demand for the two types of coal produced in Appalachia boosting U.S. mine operators' profits in the upcoming quarters, despite U.S. electric companies seeking to use more natural gas. India and Europe are forecast to import more of the dirtier-burning coal used by electric plants. In addition, rising prices of metallurgical coal used in the manufacture of steel will boost companies' profits as it is also used by developing nations to expand their infrastructure.

9. Natural Resource Partners ( NRP) is a limited partnership company owning and managing coal properties in three coal producing regions of the U.S., namely Appalachia, the Illinois Basin and Western U.S. The company does not operate any mines, but it has long-term lease agreements for coal reserves.

For the first quarter of 2011, the company reported 34% year-over-year increase in net revenues to $84.9 million. Net income grew to $44.4 million or 42 cents per share, compared to $16.9 million or 24 cents in first quarter 2010. During the quarter, NRP's coal production was up 11%, while royalty revenues zoomed 39% from the prior year's same quarter. Moreover, during the first quarter, the company completed three acquisitions in Deer Run property in Illinois and two reserve acquisitions in Tennessee and Kentucky for a combined $90.7 million.

Recently, NRP acquired a 21-year term overriding royalty interest for $16.5 million in Frac Sand reserves located on 711 acres near Tyler, Texas. The buy is an attractive pick as the reserve is strategically located near several shale gas basins in Texas, Louisiana, Oklahoma, and Arkansas and is utilized by oil and gas service companies in the fracturing process during the completion of wells. The sand reserves, currently mined, processed, and sold will generate immediate income for NRP.

Of the eight analysts covering the stock, 50% recommend a buy while 38% rate a hold. A Bloomberg consensus forecasts an average 12-month price target of $35.20, nearly 17.3% higher than the stock's current price.

8. Alliance Resource Partners ( ARLP), a limited partnership company, is a diversified producer and marketer of coal mainly to U.S. utilities and industrial users. The company has nine underground mining complexes and one coal loading terminal spread across the Illinois Basin, Central Appalachian and Northern Appalachian. Besides, the company is also constructing a new mining complex in West Virginia, in addition to an existing facility.

Total revenue for the first quarter of 2011 was up 11.2% to $423.3 million from the same quarter of the earlier year. Net income for the quarter stood at $95.4 million or $1.99 per share, compared to $75.0 million or $1.56 per share during the first quarter of 2010. Sales stood at 7.5 million tons of coal, up 2.1% from the year-ago period. Price per ton increased 9.6% for the same period.

With industrial and commercial electricity consumption expected higher in 2011, coal prices are likely to spike, thereby supporting dividend growth for high-dividend growth companies like Alliance Resource. The company has a current dividend yield of 5.02% with a payout ratio of 46.25%. For 2011 first quarter, the company raised its dividend to 89 cents per share, representing a year-over-year 12.7% and 3.5% sequential increase.

Looking ahead to 2011, the company estimates coal production to range from 31.6 to 32.6 million tons, with contractual commitments and pricing for its estimated coal sales of 32 to 33 million tons secured. Meanwhile, full year revenue, excluding transportation costs, is forecast between $1.75 and $1.85 billion and EBITDA to range from $545 to $585 million. Net income is pegged at $345 to $385 million. Capital expenditure is seen ranging from $320 to $360 million.

Of the 10 analysts covering the stock, 30% recommend a buy while 60% rate a hold. The stock's average 12-month price target is $81.33, which is 19.9% higher than the current price, as per a Bloomberg consensus.

7. Penn Virginia Resource ( PVR) engages in the management of coal and natural resource properties and the gathering and processing of natural gas in the U.S. Broadly, its operations are structured into three segments: coal and natural resource management contributing majority of the revenues, and natural gas midstream.

The company recorded total revenue of $253.5 million for the first quarter of 2011, up 22.8% from the year-ago period. Net income for the quarter was reported at $8.2 million, or 17 cents per share. During the quarter, coal royalty tons stood at 9.9 million as compared to 8.2 million, while average coal royalties were up 15.2% to $3.94 per ton. In the natural gas segment, daily throughput volumes surged 36.4% to 420 million cubic feet (MMcf/d).

The company recently announced the acquisition of a natural gas gathering system and processing facility in the Texas Panhandle area for $11.4 million. The acquired assets comprise of a 20 MMcf/d cryogenic processing facility and an approximate 15-mile gathering system in Lipscomb and Hemphill Counties, both connected to PVRs' existing Panhandle Systems and strategically located to supply active producers in the Granite Wash formation.

Quarterly cash distribution for the first quarter of 2011 was 48 cents per unit, representing a 2.1% increase from the first quarter of 2010 and fourth quarter of 2010. On an annual basis, cash distributed amounted to $1.92 per unit. The company has updated its 2011 guidance -- expects EBITDA to range from $230 to $240 million and distributable cash flow between $140 and $150 million.

Of the seven analysts covering the stock, 29% recommend a buy and 71% suggest a hold. A Bloomberg consensus projects an average 12-month price target of $30.50, about 25.2% higher than the stock's current price.

6. Consol Energy ( CNX), operating in the coal and gas segments, is a multi-fuel energy producer and energy services provider serving the U.S. electric power generation industry. The company's properties are located in the Northern and the Central Appalachian basin from where it produces pipeline coalbed methane (CBM) gas, and oil and gas from properties in the Appalachian and Illinois Basins.

For the first quarter 2011, the company reported GAAP net income of $192 million or 84 cents per diluted share, compared to $100 million or 54 cents per diluted share in the prior year's same quarter. The coal division, posting record revenue of $1.13 billion, contributed towards a 92% increase in net income. Sales for the quarter were $1.4 billion from $1.2 billion in the earlier quarter. Coal sales of 16.7 million tons were higher than expected, while average realized price per ton increased $10 per ton.

For the second quarter of 2011, coal production is seen ranging from 14.75 to 15.25 million tons. The company has raised its coal production guidance for 2011 to 60-62 million tons from the prior estimate of 59 to 61 million tons. Similarly, gas production guidance ranges between 150 to 160 Bcf. For 2012 and 2013, the company has upped its coal production guidance by 0.5 million tons, reflecting start-up of mid-volume production at its idled Amonate Met Mine.

Of the 27 analysts covering the stock, 78% recommended a buy and 19% rate a hold. The stock's average 12-month price target is $62.57, or 27.9% higher than the current price, analysts polled by Bloomberg say.

5. Walter Energy ( WLT), produces and exports metallurgical coal for the global steel industry and also produces steam coal, CBM gas (natural gas), metallurgical coke and other related products. Walter's operating business segments are: underground mining, surface mining, and Walter Coke.

Net income for the first quarter of 2011 almost doubled to $81.8 million or $1.53 per diluted share, compared to $41.6 million or 77 cents per diluted share in year-ago quarter. Revenue increased to $408.7 million from $312 million.

Early May this year, Walter announced the execution of mineral leases for approximately 75 million tons of recoverable Blue Creek coking coal reserves in Tuscaloosa County, Alabama, from a Chevron subsidiary. These reserves would pave the way for a strategic opportunity to assemble approximately 170 million tons of high-quality coking coal reserves for the development of a new underground, long-wall coking coalmine.

Capital expenditure for 2011 is forecast between $500 and $540 million, including expansion of Walter's Canadian operations. Full year 2011 metallurgical coal sales from its Alabama underground and surface operations are pegged to range from 7.5 to 8.0 million tons and 1.4 to 1.6 million tons, respectively.

Of the 17 analysts covering the stock, 82% recommend a buy and the remaining rate a hold. There are no sell ratings on the stock. Data from Bloomberg has analysts reporting an average 12-month price target of $157.67, which is 34.4% higher than the stock's current price.

4. Cloud Peak Energy ( CLD) operates wholly owned coal mines Antelope, Cordero Rojo and Spring Creek Mine located in the Powder River Basin of Montana and Wyoming. The company sells sub-bituminous steam coal to domestic power utilities that generate almost 6% of electricity in the U.S.

The company reported net income of $26.8 million for the first quarter of 2011, or 44 cents per share, as compared to $11.6 million, or 38 cents per share, in prior year's same quarter. Revenue was up 14.6% to $356.5 million from the first quarter of 2010. Production increased to 23.2 million from its three operated mines from 21.4 million tons in the first quarter of 2010.

Coal production from Cloud Peak's three operated mines is estimated at 93 to 96 million tons with 90 million tons committed in fixed-price contracts. Additional operating margin guidance has been updated to range from $30 to $50 million from the earlier estimate of $20 to $35 million.

Of the 15 analysts covering the stock, 47% recommend a buy and the remaining rate a hold. There are no sell ratings on the stock. A Bloomberg consensus expects an average 12-month price target of $26.57, which is 38.6% higher than the stock's current price.

3. James River Coal Company ( JRCC), mines, processes and sells bituminous, steam- and industrial-grade coal through six operating subsidiaries (mining complexes) located throughout eastern Kentucky and in southern Indiana.

Lower tons shipped in the CAPP and Midwest regions declined first quarter 2011 net revenue to $164.6 million, down 10.8% from the first quarter of 2010, although partially offset by higher average sales price per ton in the CAPP and Midwest regions. Higher costs swung the company to a net loss of $7.6 million, or 28 cents per share, from a profit of $23.2 million, or 84 cents per share, in the year-ago quarter.

The company shipped 2,073 tons of coal at $79.39 per ton during the first quarter compared to 2,400 tons at $76.92 per ton during the prior year's same quarter. Furthermore, the company announced the completion of International Resource Partners' (IRP) acquisition for $475 million in an all-cash transaction. During 2010, IRP had revenue of $490.3 million and pretax income of $51.3 million. Lastly, it reached agreements to sell approximately 800,000 tons of 2011 thermal and met coal at an average sales price of $132.32.

Of the 13 analysts covering the stock, 54% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg expect the stock to gain an average 38.7% to $27 in the upcoming 12 months.

2. Peabody Energy ( BTU) owns majority interests in 28 coal mining operations located in the U.S. and Australia. Besides, the company also markets, brokers and trades coal. Peabody structures its operations into three mining segments -- Western U.S. and Midwestern U.S. Mining, Australian Mining, and Trading and Brokerage.

Consolidated revenue for the first quarter of 2011 was reported at $1.74 billion, increasing 15% from the year-ago period on sales of 61.2 million tons. EBITDA for the quarter rose 17% to $416.2 million. Net income during the quarter increased to $176.5 million or 65 cents per share, compared to $133.7 million or 50 cents per share in earlier year quarter. On June 7, 2011, the company paid a dividend of $0.085 per share.

Meanwhile, Peabody is seen benefitting from China's demand as the country is currently facing acute coal deficit leading to power outages. The company's CEO recently said that coal demand from India and China would escalate over the next 10 years. BTU has its interests in Indonesia and Australia and is on the lookout for assets in Africa. However, China seems to be a major opportunity and Peabody is eyeing joint ventures with four to five opportunities on hand. During 2011, China is expected to import about 70 million tons of coal, while India will import about 60 million.

For the second quarter of 2011, the company expects to benefit from increased volumes in Australia coupled with higher metallurgical and thermal coal prices. Peabody guides EBITDA in the range of $525 to $625 million and adjusted diluted earnings per share of 85 cents to $1.10. For full year 2011, the company targets EBITDA to range from $2.1 to $2.5 billion with adjusted diluted earnings per share of $3.5 to $4.5. Meanwhile, full year sales are seen between $245 and $265 million tons.

Of the 26 analysts covering the stock, 85% recommend a buy and 12% rate a hold. Data from Bloomberg has analysts predicting an average 12-month price target of $77.16, about 39.7% higher than the stock's recent price.

1. Patriot Coal ( PCX) is a producer of coal and metallurgical coal in Eastern U.S. and has its operations and coal reserves in the Appalachia and the Illinois Basin. The company's operations constitute 14 mining complexes including company-operated mines, contractor-operated mines, and coal preparation facilities. Patriot Coal ships coal to electric utilities, industrial users, and metallurgical coal customers.

For the first quarter of 2011, the company recorded net revenue of $577 million, up 23.5% from the prior year's same period, as sales increased 4.8% to 7,962 from 7,595. Average sales price per ton rose to $71.64 from $61.12. However, higher costs and expenses dragged the company's bottom-line into red as it reported a net loss of $15.3 million or 17 cents per share, compared to an income of $4.3 million or 5 cents per share in the first quarter of 2010. Lastly, the company ended the quarter with cash and cash equivalents of $241.3 million, up 25% quarter-over-quarter.

For full year 2011, Patriot anticipate sales volume in the range of 30 to 32 million tons, including metallurgical coal sales of 8-8.4 million tons. Also, it expects 2011 cost per ton in the range of $63 to $67 for the Appalachia segment and $40-$43 for the Illinois Basin segment.

Of the 17 analysts covering the stock, 41% recommend a buy and 41% rate a hold. Analysts polled by Bloomberg expect the stock to gain an average 44.6% to $30.10 in the upcoming 12 months.

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