Arch Coal: Another One Bites The Coal Dust

Arch Coal, one of the biggest coal companies in The United States, entered Chapter 11 Monday morning, Jan 11th. A prominent law firm, Davis Polk & Wardwell, will be taking it through the process, as will financial advisor PJT Partners.

Arch (NYSE:ACI) hit its recent high stock price on August 31, when it closed at $9.31. By the end of September, it was at $3.30, and by the end of October at $1.50. Things got no better from there. The court filing indicates balance-sheet equity of negative $700 million ($6.5 billion in debt and $5.8 billion in assets).

There isn’t a lot of mystery about what has happened in the U.S. coal industry in recent years. Concern about global warming, and the regulations that such concern has or will engender, has pushed many energy producers away from coal, especially toward cheap natural gas. Although it is true that speaking globally coal still generates more than 40% of electricity, in the U.S. that number is below 30% now.

“Ah” you say, “but the generation of electricity isn’t the only thing coal is good for.” True. But not comforting. After all, the other big item on the demand side is the production of steel. And China’s industrial slowdown has meant a major downward pressure on prices there too.

Environmentalism and Irony

Three major U.S. coal companies filed for bankruptcy court protection within 2015: Patriot, Walter Energy, and Alpha Natural Resources.So this filing by Arch early on in 2016 emphasizes just once again how the whole industry consists of the ‘troubled waters’ in which only the brave investors/traders will fish.

There’s some irony there. Although environmentalists are happy to celebrate the demise of King Coal, they have hardly shown any enthusiasm for NG as its replacement. NG, after all, is the stuff one gets via fracking. And it is due to the new ease of the controversial practice of getting gas out of dense rock that the price of natural gas fell 75% between 2008 and 2013, putting this pressure on the coal business.