Arch Coal (ACI) Posts Q4 Loss of $1.09/Share

Arch Coal (NYSE: ACI) reported Q4 EPS of ($1.09), $0.70 worse than the analyst estimate of ($0.39). Revenue for the quarter came in at $745.2 million versus the consensus estimate of $741.5 million.

Market Trends

Arch estimates that coal maintained approximately 40 percent of the U.S. power generation market in 2014. With a mild start to winter, domestic coal consumption ended the year roughly flat, resulting in coal stockpiles at U.S. generators of 145 million tons, a level on par with year-end 2013. On a regional basis, PRB-served power plants ended the year with an estimated 60 days of supply – 8 percent lower than the regional, year-end average.

For 2015, Arch expects domestic market fundamentals to remain challenging due to the impact of mild winter weather on coal consumption and natural gas pricing and inventories. In addition, new regulations slated to take effect during the year could impact up to 25 million tons of annualized gross coal demand. In light of these developments, Arch expects declines in domestic coal use of 50 million to 60 million tons for 2015, and projects that a meaningful amount of uneconomic production will rationalize. Internal estimates suggest that along with other basins declining, Central Appalachia output will fall to an unprecedented 100 million tons in 2015.

While seaborne thermal markets continue to be challenged by oversupply pressures, power demand continues to increase around the world as countries urbanize and middle class populations expand. It is projected that by 2030, Asia's middle class will grow to more than 3 billion people, driving significant increases in steel and electricity needs in the region. To accommodate that growth, approximately 150 gigawatts of new coal-fueled capacity is currently under construction around the world and expected to be operational by 2018, resulting in an estimated 440 million tons of additional coal demand.

Global metallurgical coal markets remain weak going into 2015, with oversupply gradually being absorbed and demand growth slowing in some countries. However, with European steel sector growth projected to be above average, Arch expects 2015 U.S. metallurgical coal exports into the Atlantic Basin could remain near 2014's elevated levels. Arch believes seaborne metallurgical markets will balance over time as demand continues to grow, future production projects are canceled and current and anticipated supply rationalizations start to impact the market.

Company Outlook

Arch has established production targets for 2015 that are in line with 2014 levels. The company expects to sell between 124 million and 136 million tons of thermal coal and between 6.3 million and 7.0 million tons of metallurgical coal during 2015. At estimated volume levels, Arch is more than 90 percent committed on thermal sales for the full year.

"Our thermal portfolio is heavily committed for 2015 at prices above what we achieved in our main thermal segments in 2014 and above current market prices," said Lang. "On the metallurgical side, we have a dynamic platform with favorable cost trends and strong commitments from our North American customer base, resulting in commitments at reasonable prices for approximately 60 percent of our estimated 2015 sales."

Arch currently expects 2015 cash costs in the Powder River Basin and Appalachian region to be lower than 2014 levels, reflecting improvement in rail performance, the impact of lower diesel pricing and a full year of steady production at the Leer mine. Costs in the company's Bituminous Thermal segment are expected to be slightly higher than prior-year levels. Arch also anticipates 2015 selling, general and administrative expenses and capital expenditures, which includes land and reserve additions, to be roughly in line with 2014 levels.

"Going forward, we will continue to focus on controlling the variables we can control, while running our low-cost, high-quality asset portfolio in a way that maximizes value," said Eaves. "We are confident that by continuing to execute on our strategy to contain costs, maintain reduced capital spending and preserve liquidity and financial flexibility, Arch will be strongly positioned to excel as coal markets recover."

For earnings history and earnings-related data on Arch Coal (ACI) click here.

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