2023-04-23 03:23:42 ET
Summary
- Hallador Energy Company's growth strategy is benefiting tremendously from the all-time high in the price of Coal, and shareholders should feel the effects. The company increases its commitment to the energy cycle.
- Hallador Energy Company is an American thermal coal producer with facilities in Indiana. In 2024, the company will also enter the energy market through a cost-effective and dynamic structure.
- The company will pursue growth opportunities in the coal and power markets and, from time to time, will prioritize those that offer the highest value.
- There are some interesting catalysts for higher stock prices and shares could get cheaper than current levels. Catalysts are continued fiscal strengthening, the commissioning of the Indiana power plant plan, and coal prices and coal demand prospects.
This analysis supports a Hold rating on Hallador Energy (HNRG). This US thermal coal producer and future power producer is well positioned to continue to benefit from a benign coal price environment. Shares are cheap given an interesting growth outlook, but there is a chance they will get cheaper.
The Recent All-Time High In Coal Prices
Look at the Trading Economics chart below and you will see that the market price of coal hit an all-time high of $457.80 per ton in the summer of 2022, which is a stunning rise from any average line that represents a long-term trend in commodity prices.
The historical high was more than 2.5 times higher than the benchmark's 5-year average of ?$175 per ton.
Coal prices have been boosted by the reopening of mines in Germany to temporarily replace Russian gas as an energy source and help Europe become independent of Russian energy products.
What Record High Coal Prices Meant for Hallador Energy Company
Coal investors may have benefited greatly from the sharp rise in prices, as did likely coal company shareholders and the producers themselves, such as Hallador Energy Company.
Last summer, the Terre Haute, Indiana-based thermal coal producer managed to secure a contract price of $125 per ton of coal for the delivery of about 2.2 million tons of raw material to power plants.
Some deliveries took place in the very last half of 2022, these will be delivered in 2023 and also shipped in 2024 and 2025.
Based on Hallador Energy Company's recent history, the selling price of $125 per ton of coal is excellent, as it represents a remarkable 216.4% increase over the average selling price of $39.51 the US producer demanded in 2021.
The achievement will undoubtedly benefit the company as it could further strengthen its balance sheet and accelerate the start-up of the recently acquired Merom power plant.
The latter is a 1 GW coal-fired power plant in Indiana, which will enable Hallador to also operate in the energy market through a competitive structure beginning in 2024. So Hallador's strategy is to take advantage of the energy market when it offers better growth opportunities than coal.
The organization will provide logistical support for Hallador Energy's coal production up to a maximum rate of 40% of total production, say about 3 million tons, based on the expected 2023 production of 7.5 million tons.
The operation of the Merom power plant will be flexible and Hallador's current price package allows the Merom power plant to make a significant contribution to covering the company's fixed costs, even as the focus shifts to the coal market.
The structure looks for the best possible placement for its own coal production, either on the coal market or on the energy market, in short, the one with the highest value.
The company reduced its bank debt to $85.2 million as of December 31, 2022, from $111.7 million as of December 31, 2021, thanks to a significant 13% year-over-year increase in operating cash flow to $54.2 million in 2022. While the leverage ratio improved to 2.05x from 2.34x, versus a company covenant of 3x. Hallador Energy ends 2022 with available liquidity of $32.1 million versus $35.9 million in 2021.
The impact of these improvements was positive for the share price, which has cyclically risen to its current level of $8.53 since the $125 per ton contract for 2.2 million tons of coal.
Global Coal Demand Outlook
The company says it has invested significant capital growth to ramp up production ahead of resilient coal demand and Merom's power generation hub.
After global coal demand reached a record high in 2022 (? 8 billion tons) amid the energy crisis, the International Energy Agency [IEA] forecast that global coal consumption will remain robust in the years to come, mainly for two reasons: “absence of stronger efforts to accelerate the transition to clean energy” says the IEA, and huge implications from developments in China and India.
The growth rates of these two developing or emerging countries are impressive compared to Western countries. China is now recovering after lifting what it used to call zero tolerance for the Covid-19 virus. India will reach a demographic record this year due to exponential population growth. India's population will surpass that of China, which is currently the largest in the world.
“The State of World Population 2023 report by the United Nations Population Fund (UNFPA) estimates India’s population will be 1.4286 billion by the end of June, compared with China’s 1.4257 billion.”, says theguardian.com.
As a benchmark, theguardian.com found that the United States, the world's largest economy, ranks third as its population is estimated at 340 million people at the end of June.
IEA also says that “developments in China, the world’s largest coal consumer, will have the biggest impact on global coal demand in the coming years”.
Therefore, after the central bank tightened monetary policy to combat inflation, the economic recession should have no significant impact on coal demand anyway or be offset by the upside effects of developments in China and India.
In response to the above scenario, Hallador Energy, which produced about 6.5 million tons of coal in 2022, up 12.1% from 5.8 million in 2021, has decided to increase production even further to 7 .5 million in 2023.
The latter production target is 15.4% year-on-year growth and 29.3% growth from 2021.
The Price of Coal
The contract to sell coal at $125 per ton of raw material through 2025 has allowed Hallador Energy Company to increase its average selling price for coal by 15.5% year-over-year to $45.64 in 2022. Coal in 2021 was $39.51 per ton.
As for 2023, the company expects a significantly higher average selling price of $58.70 per ton of coal, and robust demand conditions should support higher prices in the subsequent years as well.
The Average Selling Price of Coal in 2022 and Its Impact on Income
The average price was reached after a total of 6.5 million tons of coal was mined and part of the supplies, “a small percentage”, the company says , fell under the 125-ton contract.
The latter had an overwhelming impact on the company's earnings in 2022, as Adjusted EBITDA rose 11.8% year-over-year to $56.233 million, allowing the company to accelerate the pursuit of its growth goals.
The Estimate of the Average Selling Price for 2023
But the 2022 data is a fact, while the forecast for a higher average selling price of $58.70 in 2023 is an estimate and, as such, raises expectations that the company may have been too conservative in its determination. Especially since the company expects to ship the bulk of its production under the $125-per-ton contract in 2023. Thus, barring force majeure or other events occurring during the execution of the customer contract, the future could be even more exciting as envisioned by Hallador Energy's President and Chief Executive Officer, Brent Bilsland.
The average selling price increase in 2023 could be much higher than the 28.6% year-over-year estimate, and the impact on the company's profitability and financial leverage could be large enough to accelerate the Indiana power plant's startup.
The positive impact on Hallador Energy Company's stock price could be significant.
The Impact of Inflationary Pressures and Coal Higher Prices on the Coal Margin
In addition, investors should take due account of the following aspect: despite strong inflationary impacts on input costs in 2022, when the United States inflation rate peaked at 9.1% in June 2022 versus the target rate of 2%, coal margins were higher in 2022 than in 2021: $8.35 per ton versus $7.35 per ton.
A staggering improvement in coal margins can therefore be expected in the coming years as the Fed successfully combats inflation, which fell to 5% in March 2023 for the ninth consecutive period. Reduced inflationary pressures on operating costs will be a positive contributor to the coal margin, in addition to continued deliveries of higher-priced coal and the low-cost option to capitalize on the highest value between the US coal market and the US coal power market.
Future prices for uncontracted or partially contracted tons of coal for the period 2024 through 2027 (see table below from Hallador Energy Company's full 2022 annual report) are catalysts for potentially higher share prices.
2023 appears to be a trading year in which Hallador Energy can achieve a selling price well above the $58.70 median expected for this year.
Analysts at Trading Economics forecast that coal, which was trading at $190.35 at the time of this writing, will rise 12.5% to ? $214 a ton within a year.
The Stock Valuation
The stock has several catalysts for higher share prices should they materialize in the coming months, and given these growth prospects, the current share price appears reasonably valued. The stock was trading at $8.55 per share as of this writing, giving it a market cap of ? $287.28 million.
Increasing exposure to the stock in Hallador Energy Company means paying now for shares currently trading between the 50-day simple moving average of $8.27 and the 100-day simple moving average of $8.83.
Based on the comparison above, the current share price shouldn't look bad to a potential buyer, also because the positive underlying trend from Seeking Alpha's chart suggests price rallies rather than price declines.
But the stock price has fluctuated between a floor of $3.72 and a ceiling of $11.57, and the midpoint of that interval versus the current share price means Hallador Energy Company shares are up almost 12%.
Perhaps it would not be so bad to recapture some of that 12% by waiting for the stock price to retrace to somewhat lower levels before adding to the position.
There is a possibility that this opportunity will arise. There is room for a significant move down in the share price from current levels.
The longer trend of the 200-day simple moving average of $7.79 (see Seeking Alpha's chart above) could provide a useful benchmark for determining how deep the stock price decline should be before buying shares.
It's a 9% drop from current levels, almost a correction in stock price.
Another Seeking Alpha chart, showing the 14-day relative strength indicator (47.28 at the time of writing) over the past 52 weeks, draws attention to the fact that such a drop in the stock price can reoccur despite the ongoing positive trend. The share price had a significant decline at the end of September 2022, in the first 20 days of February 2023, and at the end of March 2023.
The headwinds that triggered the share price decline were the markets' reawakening to the need for further rate hikes to fight inflation, the resilience of core inflation fueling recession fears and the mini-crisis in the US regional banking system.
These headwinds will continue over the next few months, with some appearing more ominous than others, which have instead eased, and some to the point where it is unreasonable to still fear a banking crisis after prominent bankers and economists have reassured the financial stability of the banks.
The investment risk lies in the hawkish stance of central banks, as this could trigger a negative cycle affecting consumption and investment, which will then require less energy and hence coal as an energy source.
This risk has increased slightly after European Central Bank [ECB] President Christine Lagarde said two days ago from the French elite school Polytechnique in Paris that the ECB's monetary policy still needs some tightening as inflation remains high in the eurozone, Reuters.com reports .
However, the decline in US inflation mentioned above and the continued significant progress in the European disinflation process suggest that central banks' actions to contain inflation are having the desired effect. And since this is happening while non-farm payrolls remain resilient, the likelihood of an economic soft landing is high, with a more muted impact on coal and energy demand.
Federal Reserve officials see a mild recession on the horizon later this year as banks tighten credit conditions after the collapse of Silicon Valley Bank and Signature Bank ( SBNY ).
Thus, simply put, recession fears increase the likelihood of lower Hallador Energy Company stock prices, but the occurrence of a soft landing or a modest slowdown is unlikely to hurt the value of the coal and energy markets.
Plus, the strong recovery of the Chinese economy and the demographic explosion of India's population will counteract the negative effects of the economic slowdown and boost global demand for energy and the raw materials used to generate it, including thermal coal.
Conclusion
Favorable prospects for thermal coal price and demand as well as entering the energy market with a low-cost and flexible structure are potentially very powerful catalysts for Hallador Energy Company's share price.
The stock is not at all expensive given the growth prospects, but the conditions are in place for the price of the stock to become more attractive. So overall, the situation at the moment should imply a rating of Hold rather than a Buy.
For further details see:
Hallador Energy: Strong Prospects Could Get Cheaper