Coal Pair Trade? FBR Upgrades Cloud Peak, Downgrades Peabody On Revised Price Forecast

• Cloud Peak Energy Inc. (NYSE: CLD) shares are down 31 percent since January 5, while shares of Peabody Energy Corporation (NYSE: BTU) have lost 45 percent.
• FBR’s Lucas N. Pipes upgraded the rating for Cloud Peak from Underperform to Market Perform, while downgrading Peabody Energy from Market Perform to Underperform.
• While the structural outlook for US thermal coal producers remains challenging, there could be some improvement in the inventory scenario in the second half, Pipes stated.

Analyst Lucas N Pipes expects the ongoing met coal rationalization from US producers under bankruptcy protection to address “the foundations of current historically soft pricing levels.” He added, “Notwithstanding another leg down in steel and met coal demand, we believe the seaborne market could enter a deficit in 2017.”

Referring to the thermal coal segment, Pipes stated that pressures on US thermal coal producers not only continue, but some of them, including regulatory pressures and uncertainties, have intensified. The analyst pointed out that while soft natural gas prices and high inventories of utility coal remain concern areas, production cuts and some gas-to-coal switching in the latter part of 2016 could improve the overall inventory picture.

“We have adjusted our pricing outlook for all qualities of U.S. and seaborne met and thermal coals to reflect this continuation of market challenges,” the FBR report stated.

Cloud Peak

The price target for Cloud Peak has been reduced from $2.50 to $1.50.

Pipes believes that the decline in the company’s share price has brought its valuation to a more defensible level. The company’s current stock valuation reflects the risks and opportunities facing it.

Although the company continues to face major hurdles in the form of competition from low-priced natural gas, regulatory pressures, elevated utility inventories, soft seaborned pricing against its logistics business, its continued focus on restricting costs and capital outflows should pay off, Pipes noted.

“We are encouraged by the company’s renegotiations of its take-or-pay agreements with Westshore and BNSF and look forward to the company’s upcoming 4Q15 earnings release for further information on the extent of its relief of this overhang,” the report stated.

Peabody Energy

The price target for Peabody Energy has been reduced from $10 to $1.

Pipes expects Peabody Energy’s pending asset sale to provide some liquidity relief. He added, however, that the company’s contemplated debt exchange could “push out the nearest maturities.”