Greed, Pain and Shame in Coal Bankruptcies

Yet another coal company has declared bankruptcy.  Murray Energy, the largest private coal mining company in the U.S., has sought Chapter 11 bankruptcy protection after failing to meet loan payment deadlines.  A forbearance agreement has been reached with creditors representing more than half of the debt.   The arrangement is hoped to give Murray’s leadership time to restructure the company. 

Murray’s founder and chief executive officer, Robert Murray, is typical of coal industry leadership  -  quick to bombast and belligerence where reason and strategy might have worked better.  Instead of acknowledging that a cheaper competing product in the form of natural gas could permanently erode market share, Murray appealed to a kindred spirit in reality TV personality turned politician Donald Trump.  Like Trump, Murray thinks in superlatives, calling himself the King of Coal. In the hopes of a more favorable business environment, Murray supported Trump’s political campaign and plan to roll back safety and pollution regulation, withdraw from the Paris Accord, and repeal the Obama Administration Clean Power Plan. 

For the most part, Trump delivered on these campaign promises.  Unfortunately, the measures resulted in not much more than an assault on the environment and did little to save the coal industry.  The price of natural gas is still far lower than coal.  As recently as last week, the price of natural gas at the Henry Hub was $18.27 per megawatt hour while the price of Central Appalachian coal was $29.44 per megawatt hour.  Uneconomic coal-fired power plants are likely to continue closing and orders for coal will continue to decline.

With the hot breath of a competing product at its back, the idea of a successful restructuring for Murray Coal seems a bit illusive.  Could it be that Murray leadership is just buying time to better prepare their own exit from the industry? 

Self-dealing is a charge that has been levied against the management of another bankrupt coal company, Alpha Natural Resources.  Despite objections by the U.S. Department of Justice and the United Mine Workers Union, the bankruptcy court approved payment of $11.6 million in bonuses to eleven senior executives in 2016, the year after the bankruptcy filing. The same ruling made 6,670 active employees ineligible for retirement benefits.  Alpha Natural Resources was acquired by Contura Energy (CTRA:  NYSE) in November 2018.

Alpha Natural Resources leadership had argued that the bonuses were necessary to keep knowledgeable and experienced individuals on the management team.  Of course, money to pay those bonuses had to come from somewhere.  Creditors, protected as they are by a phalanx of lawyers in pinstripe suits, were not a likely source.  Alpha Resources turned its sights on employees, who have little to no protection in a bankruptcy proceeding.  There is something questionable about the wisdom of allocating $11 million to retain the same leadership that allowed the company to fall into financial ruin in the first place.  However, the judge seems to have swallowed the company’s story ‘hook, line and sinker.’

Murray Energy Mine Site

Robert Murray, the company’s founder and current chief executive officer, has pledged to keep all jobs for his company’s 7,000 employees.  These workers operate Murray Energy’s seventeen active coal mines in Alabama, Illinois, Kentucky, Ohio, Utah and West Virginia.  However, there are already rumors that at many as 2,000 will need to be let go from labor contracts in the near-term.  Robert will lose his executive position to another Murray family member, although he will stay on as chairman of the board of directors.  The arrangement essentially means he can have a hand in all decisions without have to take direct blame for the tough labor talks that are likely looming Murray Energy’s future.

Negotiating with labor groups can be contentious.  One need only have looked down the railroad tracks running near Cumberland, Kentucky to see how far things can go when coal workers do not get paid.  In July 2019, Blackjewel LLC discontinued operations near Cumberland and let go 300 workers.  The company unceremoniously stopped paying the employees as well as another 1,500 workers at other mining operations.  In retaliation for the unpaid wages, Kentucky workers blocked the rail line preventing Blackjewel from going to market with a train car full of coal.  As reporters gathered round the make shift protest camp, the workers described bounced rent checks and empty kitchen shelves.   After weeks straddling on the railroad tracks, the workers finally won a victory.  As part of its bankruptcy proceeding Blackjewel has agreed to pay $5.1 million in back pay to workers in Kentucky, Virginia and West Virginia.

Like Alpha Natural Resources, Blackjewel leadership appears to be well insulated from the indignities of the result without a paycheck.  The company’s chief executive officer, Jeff Hoops, has sufficient personal wealth to build a $30 million resort.  The bankruptcy proceeding details the frequency at which Hoops transferred money back and forth between Blackjewel bank accounts and his his personal accounts, even as Blackjewel bills were not paid.  Blackjewel had left taxes, royalties to the Bureau of Land Management and other supplies unpaid for months while making payments to Hoops for undocumented ‘loans.’   At least one lender participating in the Blackjewel bankruptcy has characterized the transfers as check kiting.

For many the bankruptcies of coal companies might seem like appropriate punishment for the environmental damage caused by the combustion of coal.  That is a shortsighted view.  In states like Virginia, West Virginia, Wyoming, Ohio and Montana, coal mining jobs may be the only option.  Non-payment of wages, rescission of retirement plans and discontinuation of health care coverage all present real hardship for workers and their families.  Given that we all cheerfully used the electricity generated by the coal fired power plants, we need to offer some sympathy for their plight.

Politicians with more than the next election in mind, should have orchestrated a softer landing for these workers as part of a cohesive plan to discontinue using coal for electricity.    Greater visibility on the future road pay would be a boon for shareholders as well.  Without such a plan the public stock in the list of coal companies below is not much better than a list of stocks to sell short.

Indeed, such a plan is still needed.  In its annual coal report the U.S. Energy Information Administration reported that there were 53,583 coal industry employees in 2018.  About 92% of the coal these folk produce in the U.S. is used by the electric power sector.  That demand is more likely than not going to disappear entirely in the coming years.

Among the companies listed in the table below only one has a plan to exit the thermal coal segment  -  BHP Group (BBL:  NYSE).  The New Mexico Coal project is BHP’s single coal operation in North America.  Rio Tinto (RIO:  NYSE) sold its last coal mines in 2018.  In early 2019, Glencore Plc (GLEN:  LON) pledged to cap coal output.

Not only is some sort of exit strategy needed for coal, there should be some consideration for other industries as well.  Coal is not the only product that is likely to be edged out as the world finally awakens to the very real threat of fossil fuel-induced climate change.  The oil and gas industry also needs to come to terms with its fate.  The success of natural gas is most likely only temporary as communities seek incremental reductions in carbon emissions.  Eventually even the improvements over diesel fuel and coal afforded by cleaner burning natural gas will not be enough. 

SELECTED NORTH AMERICA COAL OPERATORS
Company	SYM	Production	Stock Price
Alliance Resource Prtnrs	ARLP	1.7 B tons proven reserves	US$12.00
Anglo American Plc.	AAL.L	15 M tons metallurgical coal / yr	GBP2,043
Arch Coal, Inc.	ARCH	5.0 B tons proven reserves	$78.00
BHP Group	BBL	7 M tons produced /year in NM	$43.00
Cloud Peak Energy	CLDPQ	Spin-off from Rio Tinto Energy	na
CONSOL Energy	CEIX	698.5 M tons prove coal reserves	$13.00
Contura Energy	CTRA	1.4 B tons proven reserves	US$23.00
Murray Energy	Pvt	76 M tons annual production	na
Natural Resource Prtnrs	NRP	1.9 B tons proven reserves	$26.00
Peabody Energy	BTU	4.9 B  tons proven world reserves	$10.00
SunCoke Energy	SXC	110 M tons proven reserves in NoAmer	$5.80
Teck Resources Ltd.	TECK	11.5 M tons proven reserves thermal coal	$16.00
Warrior Met Coal	HCC	Metallurgical coal only	$20.00
Westmoreland Coal	WLBAQ	480 M tons proven reserves	na

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.