Cost control and the changing face of competition from natural gas emerged as major themes facing the coal industry as the CoalTrans USA conference wrapped up Friday in Miami.
While long-term forecasts for US coal production split between flat to modest growth, prices are not seen as likely to rebound meaningfully for some time, meaning producers will have to tighten their belts further to survive the down cycle.
Some speakers said US coal producers could be more aggressive, while others defended companies' "laser focus" on cutting costs.
Michael Dudas, an analyst for investment bank Sterne Agee & Leach, said Friday that most major US coal producers have taken the right steps to bolster cash and ride out the low prices.
"Companies have done a really good job of cutting operating costs, to about as low as they can, even though opportunities remain around the edges," said Dudas. "Secondly, companies have slashed capital spending dramatically and for good reason, because cash flows are declining and prices have fallen."
Dudas said the result is capital spending is now reserved for maintenance, not growth.
Finally, Dudas said most major US coal companies have been able to "reliquify," by refinancing debt obligations, securing access to credit facilities and building cash.
"In the bottom part of the commodity cycle, production costs are really important," said Jamie Heller, president of Hellerworx, an energy and transportation consulting firm.
Heller said transportation costs should also be considered, especially if US coal is to compete in the growing seaborne market.
"[Transportation] can take away lots of economic benefits, especially in the [Powder River Basin], Illinois Basin and [Northern Appalachia], so transportation optionality is important," said Heller.
While cost controls and building up cash will help US coal producers weather the down market, it does not leave much room for mergers and acquisitions.
Kurt Oehlberg, the managing director of FBR's energy and natural resources investment banking group, said Friday he believes the opposite will happen.
"I think smaller, more niche companies emerge out of the big companies that come through, because they are looking to sell quality assets," he said.
Oehlberg said he believes private investors will fund those divestures "because the big companies don't have the balance sheets to drive that."
Gary Rogliano, the CEO of NRI Management Group, a private equity firm focused on mining, agreed that divestiture, not consolidation, is a more likely outcome, though the process will be slowed by board rooms leery of choosing the wrong assets to divest.
"Some of these companies don't want to make a sale and get embarrassed if the asset comes back," said Rogliano. "But some of these companies have to deleverage because we don't know how long this cycle is going to be."
Opinions were also mixed regarding the impact the current winter has had on natural gas supplies, and how it will effect dispatch decisions going forward.
Brett Harvey, the CEO of Consol Energy, told the conference Thursday that he believes natural gas will compete with coal for electricity but ultimately will find greater use as a transportation fuel, making it unlikely natural gas will displace coal in large amounts.
Bob Stall, a principal with Ernst & Young, said Thursday that natural gas delivered to the Northeast for power generation, where it is the dominant fuel, is already constrained by a lack of pipelines. That constraint was evidenced during the polar vortex event, when gas prices in the Northeast surged past $100/MMBtu.
In addition, most of the existing pipeline system is roughly 50 years old, said Stall. New pipelines will need to be built, but it seems unlikely, he said.
"How are you going to re-pipeline the East Coast of America, one of most densely-populated in the US," said Stall. "We already have rails to bring coal in."
Harvey also remarked that the recent volatility in natural gas prices bodes well for coal, saying they prove a small winter event can have a big impact on prices.
With that kind of price volatility, investors might be less inclined to build new gas-fired power plants, said Harvey.
