Year In Review: The Coal Sector
Peabody Energy and Warrior Met Coal: Mixed Results From Two Coal Stocks In The Portfolio
Year In Review
Yesterday, I covered my picks in the South American energy sector and their performance. Today, I’ll be doing the same with my picks in the coal sector. I have enjoyed being a shareholder of Warrior Met Coal HCC 0.00%↑ so far, with shares up more than 40% since buying. I think we have a long way to go on that one, and the Blue Creek Mine is a catalyst on the horizon, but I wish I had bought shares sooner. Peabody Energy BTU 0.00%↑ has been a dog so far, but I think they will do just fine over the next couple years as well.
Looking forward, I think the coal sector is going to look similar to the tobacco industry from two decades ago. Cheap valuations, potential for huge capital returns, and poor sentiment around the sector are just a couple reasons that I think the sector is going provide very good returns for investors over the next several years.
A Couple Mistakes (Hindsight is 20/20)
My biggest mistake in allocating to the coal sector is not taking a basket approach to the sector right from the start. Last spring, I was looking at the coal sector as something that could take years to play out, and I thought that we are still in the early innings of a long game where it will be a very good time to own coal stocks. That view hasn’t changed. I wanted exposure to thermal and metallurgical coal, and that view hasn’t changed either. That’s why I bought Peabody, but I obviously should have spread that money around to other companies in the coal sector.
Peabody is down a bit over the last year, while Alpha Metallurgical Resources AMR 0.00%↑ (86% over the last year) and Warrior (99% over the last year) have had monster runs in that period. Even if I had just went with a 50/50 split between Peabody and one of those two companies, the performance would have been better. Ideally, it would have been split into thirds, but I think all three stocks are going to deliver attractive returns to shareholders in coming years. If AMR continues to pullback after their earnings report yesterday, I might look to add that to the portfolio.
Over the second half of last year, I decided it was better late than never, and I wanted to tilt my exposure more towards met coal, which is why I added a large chunk of Warrior Met Coal to the portfolio. Again, hindsight is 20/20, but I should have been more focused on some of the met coal names right off the bat. The other mistake is passing on Natural Resource Partners NRP 0.00%↑, which I started looking at when units were around $45. I was considering selling Enterprise Products Partners EPD 0.00%↑ at the time (which I eventually sold to buy Warrior), but I think Natural Resource Partners is still an interesting way for income focused investors to get exposure to the coal sector.
Peabody Energy
Peabody was one of the more frustrating stocks in my portfolio over the last year and it was basically a volatile ride to nowhere. I was buying shares in March, April, and May of last year. I also bought a much smaller slice of Jan 2026 calls in October and December, which are down about 50% (and still very mispriced in my opinion). That doesn’t feel great, but more than 95% of my Peabody position is in regular shares, so it’s not a huge hit.
For as much as people bag on Peabody’s management, I think they have actually done a pretty good job over the last year. They have bought back 19.3M shares for $430M and completed the acquisition of Wards Well, and they are moving towards bringing the Centurion mine online in the next couple years, which will shift the company more towards met coal. I still think we aren’t at fair value, but I don’t know if I will hold onto this one as long as plan to hold onto Warrior.
I’ll be doing a more thorough look at both coal stocks and their recent quarterly earnings when I get a chance, but I’ll be holding onto my Peabody shares and calls for now. We should also be hearing from Elliott Investment Management in the next couple weeks with their 13-F, and I wouldn’t be surprised if they have fully exited their position in Peabody, which would mean an end to the selling pressure they have put on the stock over the last year.
Average Cost Basis: $24.15
Dividends received: $0.30 per share
Current Price (as of 5/5): $22.15
Total Return through 5/5: -7%
Warrior Met Coal
Warrior hasn’t been nearly as frustrating as Peabody since I bought shares. I was buying this one in late September, and obviously I should have been buying sooner than that. It’s a large position and depending on what happens with the share price, I wouldn’t mind adding shares in coming months. I’m not adding now, but if we get any sort of selloff into the mid to low $50s range, I will be tempted to make Warrior my largest position.
The reason for that is Warrior’s Blue Creek mine, which is set to come online in a couple years. If that goes as planned, I think shares are going to be a lot higher than where they are today, and then management will basically have to decide if they want to do buybacks or dividends. I hoping they follow in AMR’s footsteps and do buybacks, but I think I might be holding onto my shares for a long time.
Average Cost Basis: $47.31
Dividends received: $0.65 per share
Current Price (as of 5/5): $66.23
Total Return through 5/5: 41%
Conclusion
We will see what happens with the coal sector over the next couple years, but I think we are still in the early innings for the sector. Peabody has been a dog, but I think that is going to change at some point. Warrior, despite the run in shares over the last years, is still attractive, and I think any material selloff is a buying opportunity for long term investors. Those two companies are the main focus for the coal sector in my portfolio, but I have been looking at other opportunities in the sector. One in particular I find interesting is Glencore, but we will have to see if they decide to spinoff the coal assets. Tomorrow, I’ll be doing a breakdown of my offshore oil services basket, another sector that I think will be a good place to invest for coming years.
Disclaimer
I own shares of Peabody Energy and Warrior Met Coal. I also own calls on Peabody. I don’t own Natural Resource Partners or Alpha Metallurgical Resources. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.