BTU - Whitehaven: 'Weathering' The Storm Buying For The Long Haul

2023-06-12 15:35:31 ET

Summary

• After a 1300% post-COVID run, WHC has come back from orbit over the past 6 months (-38%). Record-breaking warm weather and stretched technicals/sentiment have taken a heavy toll on coal.
• However, coal prices are showing signs of bottoming, and Whitehaven is trading at valuations last seen in 2020-2021 - seemingly an overreaction to the downside.
• I think current levels represent good value to continue accumulating. I reiterate my “buy” rating.

Introduction

In my previous article on Whitehaven Coal ( WHITF ), I highlighted the stock's strong fundamentals, attractive valuation, and commitment to significant share buybacks (25%+ of shares). I like stocks like these, as they are often shielded from excessive downside and have substantial potential for gains.

However, I also encouraged investors to approach cautiously as the stock appeared stretched and at technical resistance. Since then, and in large part due to warm winter weather, Whitehaven has fallen over 35%, significantly underperforming the indices. I believe now, though, current prices again offer investors an opportunity to continue accumulating, and I reiterate a "Buy" rating for the shares.

In the following article, I'll discuss recent developments, the forward outlook, and technicals and risks.

Sentiment and Technicals Were Stretched - A Bad Combination for Whitehaven

Towards the end of last summer, the gas crisis in Europe (and by extension, coal supplies) seemed dire. Bloomberg, for example, wrote that "keeping the lights on in winter will be very hard," highlighting blackouts already occurring 4 times per day in some areas of Europe to conserve power.

As I have grown as an investor, I've come to realize that sentiment matters significantly, and articles like this one from Bloomberg or CNBC often indicate that much of the move has already occurred; they often come at extremes in sentiment.

This certainly proved to be the case for European gas and Whitehaven. Although I imagined the stock might experience some moderate declines and consolidate its remarkable 1300%+ gains, Whitehaven rolled over relatively hard.

This past winter of 2022 was unusually warm, and in my assessment, this played a very large role in Whitehaven's large decline. The European winter was so warm, in fact, it was the second-hottest "on record," and the hottest in 45 years. There were, additionally, several record-breaking warm days of record , dating back to the 1850s. This was good for Europe and European people, as they were not faced with energy shortages, but also, however, bad for coal prices and Whitehaven's stock.

Coal Prices Starting to Bottom, Whitehaven's Valuation Now Near COVID Lows

I detailed more about coal and nat gas price declines in my first article on CEIX in February, but since then, prices are finally showing positive/bottoming signs. Newcastle Coal futures have positive money flow and momentum divergences on the 3-day chart, and also just hit support from 2011, with lots more support below that:

I usually prefer to wait for a positive weekly divergence before becoming truly bullish on something, and that may still be necessary here. I also think, however, that given factors like coal company valuations and Whitehaven's massive buyback, a positive divergence opportunity could possibly be brief and present itself only at a price 15-20%+ higher than here. It seems to make sense to me to accumulate more but not go "all in" here.

Digging more into valuations, Whitehaven is actually now trading at a P/S multiple last seen in 2020 and an Enterprise Value close to its post-COVID lows. Both metrics are interesting to look at and provide a clue as to how cheap Whitehaven has returned to being.

Interestingly, Whitehaven is now trading at a lower valuation than much of 2021 - a year in which it went up almost 60% - and a lower valuation than its brief selloff in 2022, which preceded a 150% run. The Company is again in Cheap territory.

WHC Technical Analysis

Technical analysis for Whitehaven's stock looks a bit mixed. As shown above, Newcastle coal prices have positive divergences on lower time-frame charts, but again, I often like to use weekly charts for swing and intermediate moves. Here is my analysis on WHC and two potential scenarios I can see playing out:

TA Notes:

1. Volume - Volume has risen over the past few weeks, but it's still not at "capitulation" or "turning" levels. I've drawn a trendline anticipating a volume build no matter what path we take. That would/will be a bullish signal.
2. Money Flow - In the first indicator panel, money flow has NOT made a new low with price. This is a positive divergence, but it also doesn't look fully resolved yet.
3. TSI - In the second indicator panel, the momentum indicator True Strength Index has actually made a negative divergence with the recent price drop, meaning momentum has actually worsened. A rebound in this indicator will be an important tell.

Scenarios:

As you can see, I think one scenario (green) exists where Whitehaven is trading near its lows of this cycle, though I believe it would offer a backtest or two before really breaking out. This would likely come with a hot summer and indications of a cold winter, along with no further economic deterioration.

I also think there is a possibility (red) that Whitehaven has to drop another 25-30%. This would give the indicators time to fully reset and also allow the equity to backtest the long-term level it broke out from in Summer 2022.

Risks

As I have noted before, the main risks I see to the Whitehaven thesis include geopolitics, namely the war in Russia/Ukraine, as well as government policies like adding windfall taxes or even operational stoppages. Investors should be aware of and comfortable with these risks.

One other big risk I wanted to highlight for shareholders in this article is acquisition risk. As I have also discussed before, big mining companies like BHP ( BHP ) and Glencore ( GLCNF ) are starting to divest their coal assets. In fact, BHP is in the process of selling one right now . Who are they selling to? Reportedly, smaller operators like Whitehaven, Coronado, Yancoal ( YACAF ), and Peabody ( BTU ), among others.

While buying assets at these levels will probably pay off, as operators seem likely to make money over the rest of the cycle, stocks acting as acquirers notoriously decline after deals are announced. Coal companies will be no exception to this rule; they may even provide textbook examples for it.

I'd expect the market immediately takes an axe to whichever company "wins" the bid for BHP's assets in this sale and other coal assets over time. Coal shareholders want capital returns, not more capital investment, and acquisitions always introduce risk and take capital away from shareholders, at least in the short term. WHITF and other coal investors should be prepared for the possibility of a 10%+ down day and possibly further sinkage in the case of an acquisition.

Closing

In summary, I believe Whitehaven still has good times ahead, even though the short term has been tricky. With supply limitations, share buybacks, and weather unlikely to repeat several warm winters in a row, I think the equity will eventually reprice, perhaps to the mid/high-teens, especially when dividends are included.

I am still holding my roughly half position at this point and will be looking to add opportunistically around these levels and in any significant market dislocations. I think investors interested in WHC with a similar and appropriate risk profile can do the same while watching for clues as to how aggressively to proceed.

Thank you for reading, and as always, consider what's best for your risk tolerance, time horizon, and overall portfolio before making any financial decisions. Do not make decisions based on any one viewpoint, including mine. I often like to be active in the comments, so leave your thoughts or questions below if you care to.

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