JRCC

Coal Industry Update

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In July of last year, Valuentum offered its comprehensive outlook for the coal and railroad industries (click here). Since that time, Union Pacific (UNP), our favorite railroad idea, has surged to $185 per share from $155 per share, while some of our biggest concerns regarding the coal miners have come to fruition. James River Coal (JRCC), one of the most indebted miners in the industry, filed for Chapter 11 bankruptcy Tuesday, a process that will likely result in the complete eradication of shareholders’ equity as the firm restructures: James River intends to use the Chapter 11 process to continue implementing a comprehensive turnaround plan aimed at addressing its challenges in the changing coal mining industry. James River expects its mining … Read more

Air Quality Standards Take Aim at Coal

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After competing with an abundance of lower-priced, cleaner natural gas, coal miners (KOL) may now have to deal with more demand headwinds as governments aim to reduce coal burning. The US Expectations are already for as much as 27 gigawatts’ worth of coal generation (about 8.5% of the US coal fleet) to retire by 2016. This percentage could rise to nearly 17% (one-sixth) by 2020, according to the Energy Information Administration. In addition to the expected retirements, the Environmental Protection Agency (EPA) plans to block all new coal-fired plants unless the construction of these plants coincides with expensive technology that captures greenhouse gas emissions. Image Source: Energy Information Administration Though the EPA forecasts that no traditional coal-fired power plants (1) … Read more

Valuentum’s Joint Outlook for the Railroad and Coal Industries

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Key Takeaways: North American railroads operate as an oligopoly, benefit from substantial barriers to entry, and boast significant pricing power. Free cash flow generation trends are strong at the largest operators–Union Pacific (UNP) and Canadian National (CNI)–but industry-wide free cash flow margins (free cash flow divided by revenue) average in the mid-single-digits as elevated maintenance capital costs weigh on conversion rates. Canadian National and Union Pacific are currently the most efficient operators (as measured by their respective operating ratios), while Genessee & Wyoming (GWR) and Canadian Pacific (CP) trail the pack. Coal is the single most important commodity to the railroads, accounting for more than 20% of class I railroad freight revenue. Though US coal volumes should advance over the … Read more