Arch Coal Inc. ACI had announced its plan to go for a reverse stock split on Jul 20. After postponing the plan on Jul 28, the company finally started to trade on the New York Stock Exchange (NYSE) on a reverse stock split basis from Aug 4.
The one-for-ten reverse stock split is intended to increase the market price per share of Arch Coal’s common stock to allow the company to maintain listing of its common stock on the NYSE. Arch Coal lost nearly 90% of its price on the exchange in the first eight months of this calendar year.
Tough Times for Coal Stocks
U.S. coal producers have been under tremendous stress over recent times and to combat this highly challenging environment, they’ve cut down overall cost through mine closure, slower production rates and layoffs.
Ongoing softness in demand and decline in selling price of both thermal and metallurgical coal are stretching the financial capabilities of the coal companies. Other than Arch Coal, Peabody Energy BTU and Rhino Resource Partners LP RNO have been reporting in the red for the last few quarters. Peabody and Rhino Resources have lost nearly 85.8% and 49.1% of its price year to date.
Delisting and Delisted Coal Stocks
The exchange can initiate the delisting process if a security closes below $1.00 for 30 consecutive trading days. Failure on the part of the company to revive the price of shares within a reasonable time provided by the exchange would lead to delisting.
Last month, NYSE delisted coal companies Walter Energy and Alpha Natural Resources due to continued “abnormally low” stock prices.
Will the Strategy of Arch Coal Work?
Arch Coal opted for the reverse stock split to increase the value of its stock and keep it listed on the exchange. Post reverse stock split, Arch Coal’s common stock declined from 213 million to nearly 21.3 million.
Though Arch Coal’s shares opened at $1.61 on Aug 4, post reverse stock split it has already lost 22.9% in three days to close a$1.31 yesterday.
We believe reverse stock splits are temporary arrangements. It will be extremely difficult for coal companies to survive unless we see a revival in demand and improvement in selling prices. The recently announced Clean Power Plan by the White House is a final knockout punch to the already corned coal companies.
Way Out for U.S. Coal Operators
Depending solely on coal operations is not going to help the U.S. based coal companies. These companies need to diversify their revenue stream. For instance, CONSOL Energy CNX has already shifted its focus to the natural gas business to counter coal industry challenges.
Domestic demand for coal is unlikely to improve in the near term, thanks to the Clean Power Plan, under which the U.S. Environmental Protection Agency (EPA) calls for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. Coal based power plants are the primary source of CO2 emission and we will increasingly see older and larger coal plants going out of operation.
U.S. coal producers will have to depend on international sales. Moreover, if we were to realize the full potential of this cheap and abundant fossil fuel, domestic utility operators will also have to invest in new carbon capture technology. The revival of coal depends on the willingness of the utilities to make such investments.
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