Here is the latest thinking by Credit Suisse on US coal sector (specially focus on last paragraph):
"February Coal Trend Watch - Inventory Declines Accelerate Based on data released by the ITC and the Dept. of Energy, as well as DOE estimates to January, we estimate the US coal market was in a 5.7m ton deficit in January. Importantly, the updated DOE estimate for December inventories was ~190m tons, implying a 17m ton inventory drawdown in Dec alone (vs. a previous DOE estimate of ~1m ton inventory draw in Dec).
Taken together, the December & January data suggests total electric utility inventory declines of ~20m-25m tons during the past 2 months, representing the largest 2 month inventory draw in the past 14 years.
Production – U.S. coal production declined 11.1% y/y in Jan. and declined 3.4% sequentially.
Consumption – We estimate U.S. coal consumption declined 2.7% y/y in Jan (+1.5% sequentially). Coal consumption for electricity generation decreased 2.5% y/y (+0.7% sequentially).
Exports/Imports – Based on actual US ITC data to Dec. and EIA estimates for January, total exports declined ~1m tons in January y/y (or -20.4%).
Inventories – We estimate inventories at the end of January were 187m tons, down nearly 20m tons from the Nov 2009 peak (still 47.3% above the previous 10-year average and 19.6% above prior year).
Our Thoughts – As noted previously…our view remains the US thermal coal market has the potential for unprecedented inventory draws over the next 12-18 months, to the extent that we believe US thermal coal will shift from an oversupplied to an undersupplied situation, and prices will respond accordingly (a scenario not reflected in the stocks…see 2/11 note for details). To this end, the November & December data suggests this is already under way, with the preliminary data implying the largest 2-month inventory decline in the past 14 years. While it is unlikely the drawdowns will continue at the same pace in the near-term (weather-related seasonality), the Dec/Jan declines set the stage nicely for what we believe will be a swing from above normal to below normal inventories during the next 12-18 months."
Using the same thesis provided by Credit Suisse that US coal market will be undersupplied and prices will rise, last week on Wednesday March 10, Goldman Sachs raised price targets on five coal companies: ANR - $58 to $64; ACI - $27 to $28; CNX - $65 to $68; MEE - $53 to $60; PCX - $18 to $22; BTU - $59 to $64.
- Buy to open April $48 puts- Sell to open April $49 puts
The mark on this trade as of Friday, March 12 is $0.20 credit. Does it meet the 5-10-20 test?
5% - No more than 5% of portfolio should be allocated in any single option trade - Check
10% - The cushion between $49 strike and current stock price of $54.33 is 10.2% - Check
20% - Max profit on the trade is 0.20/0.80 or 25% before commissions - Check
We don't have earnings risk as they're not expected until end of April. We have GS and CS brokerage houses behind the name and I believe more will join. Assuming the rising support line will remain intact and the stock may potentially breakout of the converging triangle to the upside, if you're willing to accept slightly lower cushion for higher profit, then 49/50 bull put spread can be done for $0.25 credit.
For more on my 5-10-20 rule, click here: 5-10-20 Rule
Good luck!
