How Norfolk Southern Could Benefit From A Revival In The Coal Industry Under The Incoming President

The outcome of the recent U.S. presidential election could trigger a revival of the U.S. coal industry. President-elect Trump has promised to take steps to rejuvenate the embattled domestic coal industry, including rolling back environmental regulations which have contributed to the decline in the fortunes of coal mining companies. In addition to the adverse regulatory environment, weak natural gas prices have also negatively impacted the fortunes of coal miners. A steady shift towards natural gas as the preferred fuel for electricity generation by utilities has seen the share of natural gas in U.S. electricity generation exceed that of coal this year. ^[1] President Obama’s Clean Power Plan, introduced earlier this year (and challenged in the Supreme Court since), targeted a 32% reduction in power plant carbon dioxide emissions below 2005 levels by 2030, and was expected to further erode the demand for coal by utilities. ^[2] The incoming administration could revoke the Clean Power Plan, which would benefit coal miners as well as companies involved in the transportation of the commodity such as Norfolk Southern. ^[3]

How Norfolk Southern Could Benefit From A Revival In The Coal Industry

Steps proposed to be taken by the incoming administration could arrest the decline in the demand for coal. However, any recovery in demand is likely to be muted if natural gas prices remain subdued. Natural gas prices are set to rise next year, with the EIA expecting benchmark prices to average $3.12 per MMBtu in 2017, as compared to $2.50 per MMBtu in 2016. ^[4] If gas prices continue on such an upward trajectory, a recovery in the demand for coal is plausible. We currently expect U.S. rail shipments of coal to decline by around 10% from 2016 levels by the end of our forecast period. However, in case the incoming administration creates a more favorable regulatory environment for coal, and natural gas prices continue to increase, we would alter our forecast for coal shipments. In this scenario, we expect U.S. rail shipments of coal to increase by 5% from 2016 levels by the end of our forecast period.

See our forecast for U.S. rail shipments of coal in this scenario

In addition to our forecast for U.S. rail shipments, we have also modified our forecasts for revenue per carload of coal freight and the company-wide EBITDA margin to reflect the changed demand conditions for coal in this scenario.

See our complete analysis for this scenario here

The aforementioned changes to our forecasts from the base case (in case of a revival in the coal industry) translate into a 9% increase in our price estimate for Norfolk Southern. Thus, the incoming administration could significantly boost the prospects of Norfolk Southern if it follows through on its promises.

Have more questions about Norfolk Southern? See the links below.

• What Is Norfolk Southern’s Revenue And EBITDA Breakdown?
• What Is Norfolk Southern’s Fundamental Value Based On 2015 Results?
• How Has Norfolk Southern’s Revenue Composition Changed Over The Last 5 Years?
• By What Percentage Did Norfolk Southern’s Revenue & EBITDA Grow In The Last 5 Years?
• By What Percentage Can Norfolk Southern’s Revenue & EBITDA Grow In The Next 3 Years?
• How Will Norfolk Southern’s Revenue Composition Change By 2020?
• What Would Be The Impact Of A 100 Basis Points Increase In Norfolk Southern’s Share Of U.S. Rail Intermodal Shipments?
• Norfolk Southern Corporation: A Look Back At The Year 2015

Notes:

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1. Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016, EIA Website [↩]
2. FACT SHEET: Clean Power Plan By The Numbers, EPA Website [↩]
3. Trump Can Ax the Clean Power Plan by Executive Order, Wall Street Journal [↩]
4. Short Range Energy Outlook, EIA [↩]