Alpha Natural Resources (NYSE:ANR) has endured weak demand from power utilities through an unseasonably warm winter in the U.S. and stiff competition from cheaper natural gas. Metallurgical coal, which sells at a premium to thermal coal, is also seeing some weakness in demand due to slowing growth in China and Europe. However, after its acquisition of Massey Energy last year, Alpha Natural reported to have achieved $150 million of synergies during Q1 2012 and expects that to increase to $220-260 million by mid-2013.  This should provide a boost to margins and allow it to remain competitive with other coal producers like Arch Coal (NYSE:ACI), Peabody Energy (NYSE:BTU) and CONSOL Energy (NYSE:CNX).
We have revised our price estimate for ANR down to $20, which is still significantly ahead of the market price, to better reflect the current market conditions. Expected shipment volumes and prices for utility coal and met coal have been reduced per the 2012 outlook from management, and we have also revised our 2013 and 2014 forecasts. Our long-term outlook remains bullish largely due to the long-term outlook for coal demand from export markets and sustainable U.S. demand.
U.S. Coal demand to rebound
Unseasonably warm weather during the winter in the U.S. curtailed demand for thermal coal by utility companies. Separately, coal-fired generation has fallen to less than 40% of U.S. power generation on account of the abundance and lower prices of natural gas. These factors have combined to cause a substantial dip in thermal coal shipments as well as realizations. On the other hand, the costlier met coal shipments dropped by almost 400k tons (compared to Q4 2011) during Q1 2012 and faced lower per ton realizations, largely due to increased global supply and a geographically mixed demand picture. However we expect that the met coal market will rebound more rapidly than the domestic thermal coal market and should show encouraging signs by the end of 2012. We expect the decline in shipments to be short-lived and anticipate a revival by 2013, which would also help in margin improvement.
EIA optimistic about coal’s prospects in the U.S.
Although coal is losing share in U.S. power generation, according to the U.S. Energy Information Administration (EIA) its share should remain stable at around 39% by 2035.  In that case we would expect healthy U.S. demand going forward, particularly in future winters.
Source: AEO2012 Early Release Overview 
Emerging markets should drive exports
Alpha has been increasingly shipping thermal coal to destinations like India and China, which are vital coal markets. This is evidenced by the fact that the healthy 4% growth in Chinese steel production in March stabilized the volatile global coal prices. A focus on exports will be critical for Alpha as its primary growth opportunities lie in these emerging markets given that U.S. demand is unlikely to increase materially.Notes:
- Alpha Natural Resources Announces Results for First Quarter 2012, Press Release, May 3, 2012 [↩]
- AEO2012 Early Release Overview, eia.gov, January 23, 2012 [↩] [↩]