Arch Highlights Coal's Big Potential

By Paul Baiocchi | April 07, 2008 | 12:50 PM | 0 Comments

Arch Coal (ACI) and the Coal industry at large are standing by waiting to solve our energy problems; trouble is, nobody is paying any attention to them. At a time when Politicians are stumbling over one another in order to condemn big oil it is ironic to see so little mention of companies like Arch Coal who are at the forefront of the battle to create zero-emission coal plants by the end of the next decade. It is the coal-to-gas and coal-to-gasoline (CTG) plants that are under construction globally and the companies involved in the development of these technologies who are the real frontline soldiers in the war against climate change. Arch coal has the potential, based on current reserves, to supply 5 billion barrels of oil equivalent to the U.S. market as part of what could become a 150 million ton conversion of domestic coal to liquid fuels over the next two decades. Combine Arch Coal's prominent role in the CTG revolution with the company's 6% share of the U.S. electricity generation, immaculate balance sheet, and pristine environmental track record and you have one of the greater stories never told.

While coal stocks have rallied since March 20^th, Arch Coal has outperformed, reaping the rewards of higher coal prices and a surplus of good news. The recent strength in Coal prices has buoyed Arch's shares while the company's strong 4^th quarter added to an already stellar balance sheet. The company now boasts a miniscule .28 debt ratio and Debt to Equity of less than one. It may be hard to believe, but Arch's present strength behind a year when the company generated $330 million in cash flow from operations pales in comparison to the potential offered by the company's extensive resource base and investment in technology.

Back in March, CEO Steven Leer made headlines when he forecasted an increase to 80 million tones of exported coal from the U.S. in 2008, followed by an all-time high north of 100 million tons by the end of the decade. If he is correct and the international demand for coal outstrips global supply in the near future, Arch stands to benefit greatly from this trend. Arch represents the epitome of flexibility in this space, with un-priced production of 90 million tons for 2009 and 132 million more for 2010. For example, its recent surge in shipped coal to the developing Mexican economy highlights how company is continuously putting the physical and operational infrastructure in place to exploit international market opportunities and to diversify its income statement. Considering 90% of the company's coal is sold to the U.S. market, however, Arch has plenty of room for improvement.

Arch Coal's commitment to flexibility has not been lost on the company's cost strategies as the company has seen operating leverage decrease as the convergence of the company's stringent safety policies and operational efficiencies have lowered fixed costs while at the same time improving goodwill.

At the same time, the company doesn't put that goodwill ahead of common sense. For example, Arch is one of the few union-free coal miners worldwide. It should, therefore, come as no surprise that the company has been better able to manage costs in the past decade as union influence diminished and quality control programs were implemented. As a result of these efforts, Arch now sees all regions contributing to margins equally while the company's safety records lead the industry.

For those familiar with the energy industry as a whole and the politics associated with them, Coal has always been the black sheep of the energy spectrum. Strong public disinformation has been an Achilles heel for Coal companies in the past and the present is no exception-witness Saint Gore's idea that despite the world's current energy crunch, there should be a moratorium on building any new coal-fired energy plants. Arch Coal, more than any other company in the industry, is trying to erase the stereotypes of years past and gain public support for an industry which has so much to offer those seeking true energy independence. Through its equity share in a CTG facility in Wyoming, its unprecedented full environmental impact report on Mountain Laurel, and its inclusion in Forbes' list of the most trustworthy companies, Arch is the model for the modern energy company. 

Instead of pointing fingers at the companies who are "exploiting" our dependence on foreign energy we should be applauding those companies hoping to eradicate it. In the meantime, investors looking for an opportunity to pre-empt this trend can look at Arch Coal or a broad coal industry portfolio.