Alpha Natural Resources: Strong Earnings, Estimates Updated for Massey Deal

Alpha Natural Resources (NYSE:ANR) completed its first full quarter of operations after the acquisition of Massey Energy and the results posted by the company a few days were very strong, with Q3 profit and revenues rising more than 100 percent on a y-o-y basis. Alpha Natural Resources engages in the production, purchase and sale/resale of Industrial and Metallurgical coal. The company also earns revenues by providing freight and handling services to its coal customers. Alpha Natural Resources competes with other coal producers like Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI) and CONSOL Energy (NYSE:CNX).

We have updated our the Trefis model for Alpha Natural Resources taking into account the merger with Massey Energy. We have a $33 price estimate for Alpha Natural’s stock, which is roughly 25% above the current market price.

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The company successfully doubled its revenues in the third quarter with the inclusion of Massey’s operations and higher realized prices of coal. The addition of Massey’s operations  in Alpha Natural’s portfolio increases overall coal shipments by 50 percent.

Natural gas hurting coal sales and margins

Environmental standards today are stricter than ever and companies are looking for cleaner energy sources to meet these standards. Natural gas costs roughly the same as coal in terms of the energy produced. Moreover, natural gas is cleaner to burn and easier to transport compared to coal. Many industrial customers in the U.S. have migrated from coal to natural gas powered units as it is easier and cheaper to modify an existing unit for the new fuel. Natural gas is available in abundance and is therefore priced significantly lower than petroleum, creating a price cap for coal producing companies and hurting their margins in the process.

Coal as a fuel is now at a critical juncture, in which new technologies need to be developed in order to make it burn more efficiently with fewer emissions. We discussed one such development by Vale in one of our previous notes, in which coal is first converted into a gas before finally burning it.

Exports looking bright

Going forward, Alpha Natural expects a rise in coal exports – primarily driven by developing regions such as China and India, where consumption continues to rise and environmental standards are relaxed compared to developed nations. The company is eying the Seaborne and the Thermal coal market to drive shipments and with close to 30 million tons of coal export capacity, Alpha Natural is well-positioned.

Despite tough competition from natural gas in the domestic market, Alpha Natural Resources continues its dominance in the coal export market and now with the added capacity from the Massey acquisition, it is well-positioned for growth going forward.

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