Shares of Arch Coal (ACI) have plunged today after Morgan Stanley downgraded the company after predicting that even-cheaper natural gas would knock down coal prices–and Arch’s profits.
Bloomberg News Morgan Stanley’s Stephen Byrd and team explain:
NAPP coal demand is at the highest risk from negative gas basis in Marcellus and Utica. Although coal demand has rebounded from 2012, we see 2013 as a near term peak as regional gas prices in the production-heavy mid-Atlantic erodes NAPP demand. Although NAPP falls lower on a generic cost curve than CAPP, it is burned primarily in regions exposed to cheap gas from Marcellus and Utica production. We expect weak gas basis relative to Henry Hub to spread though PA, NJ, WV and even Ohio and Downstate NY in 2014, reducing capacity factors at coal plants in these regions. We see ~8mm tons decrease in PJM NAPP coal burn in 2014 relative to 2013.
That’s bad for Arch Coal, Byrd says. He writes:
We are downgrading Arch to Underweight from Equal-weight, driven by our more negative view of the domestic thermal coal market. Arch is a thermal-heavy name with significant balance sheet leverage, making the company vulnerable to prolonged depressed market conditions.
Also taking a hit: Exelon (EXC), which Byrd downgraded to Underweight from Overweight.
It’s not all bad news, however. Two utilities should benefit from this trend, Calpine (CPN) and Dominion Resources (D), although the advantage may already be priced into Dominion’s shares, Byrd says.
Sahes of Arch Coal have dropped 5.3% to $3.90 at 3:03 p.m. today, while Excelon has dropped 3.2% to $28.59. Calpine has gained 0.7% to $19.37 and Dominion is up 1.1% at $62.49. Consol Energy (CNX), which is also exposed to East Coast coal is down 2.1% at $37.55.
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