Arch Coal Faces Challenge from Natural Gas, New Regulation

On Nov 13, 2015, we have issued an updated research report on Arch Coal Inc.ACI . The company is striving to cut costs to save its bottom line in this challenging coal environment. Arch Coal suspended its annual dividend to preserve financial flexibility. However, the new Clean Power Plan and ongoing softness in natural gas prices are going to adversely impact demand for coal.

Arch Coal, a Zacks Rank #3 (Hold) stock, incurred an adjusted loss of $3.38 per share in the third quarter of 2015, narrower than the Zacks Consensus Estimate of a loss of $5.91 and the prior-year loss of $4.52 per share. Lower sales volume and ongoing weakness in realized price per ton of coal sold hurt its top line.

Currently, weak coal prices and a supply glut in the global coal markets have forced the company to suspend its quarterly dividend. The company has also taken measures to lower costs to withstand difficult coal fundamentals. The company's Leer mine and West Elk Mine are not only helping in cost reduction but also producing a superior quality of coal.

Arch Coal expects U.S. coal consumption in 2015 to decline by nearly 95 million tons from the prior year due to increasing competition from natural gas for power generation. In addition, U.S. coal exports are expected to fall below 2014 levels due to softness in the key global markets.

Arch Coal has operations in all major coal producing regions of the U.S. Its presence in both eastern and western parts of the country allows it to ship and supply coal to a wide range of customers. The company's focus on high-margin metallurgical coal might help, as a World Steel Association report projects an increase in global steel usage by 0.5% in 2015 to 1,544 Mt and 1.4% in 2016 to 1,565 Mt. This will likely kindle demand for met coal.

Apart from dealing with the softness in the global coal market, Arch Coal will have to withstand competitive pressure from other coal producers like Alliance Resource Partners ARLP , Alliance Holdings GP, L.P. AHGP and Peabody Energy BTU .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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