Coal prices stoke the boiler
Whitehaven Coal (ASX:WHC) posted a record FY22, primarily due to a surge in coal prices over the course of 2022. Records were achieved across several reporting metrics, while shareholder returns were at the record end of the spectrum for the year. An improved balance sheet underpinned a higher dividend and the activation of an on market buy-back.
Coal prices were swept into a sweet spot in 2021 which spilled into 2022, as pressure from two events combined to ratchet prices much higher over the past two years. Add the quality of Whitehaven’s coal, which is used in high efficient, low emissions power plants including ultrasupercritical power generation plants, has been an overriding value driver. The following chart shows a medium-term price chart for thermal coal:
Source: TradingEconomics
As Members can see from the above chart, the thermal coal price soared over the past two years, as events combined to bring about a perfect tailwind storm. Covid driven worldwide lockdowns saw the thermal coal price drop to a low of circa US$49 a tonne in 2020, as electricity demand was destroyed. A recover in demand ensued in 2021, as the world embraced an economic reopening that swiftly turned ailing electricity demand around and peaking, during September 2022, the thermal coal price at circa US$438 per tonne, representing a 794% rise. The following image shows the annual change in electricity demand, by key countries, over the past seven years and the year-to-date change for 2022 (tWh – terawatt hours):
Source: International Energy Agency
It was the surge in demand in electricity that caught a slumbering coal industry off guard and propelled the price higher. 2022 brought with it the onset of the Russia and Ukraine war and drags on to this date. As the war drags on, Russia used its monopoly supply of natural gas to Europe and particularly Germany as a weapon, by limiting supply.
This scenario playing, through over 2022 to date, gave the coal price a second tailwind. We expect the Russia and Ukraine war will continue to drag and remain a tailwind for the coal price. The prolonging of the war does allow forcibly altered supply chains to adjusted or normalize to the new regime and we believe this is happening now. The following chart shows forecast seaborne thermal coal demand by country (columns) and three supply scenarios (lines) out to 2050 (JKT – Jakarta):
Source: Wood Mackenzie
As Members can see from this chart, according to Wood Mackenzie demand is expected to remain tight out to 2050, with the two most likely supply scenarios falling short of expected forecast demand. We may not necessarily agree with this long-term scenario playing out. We expect more difficult headwinds for the coal price, as changing social attitudes against using carbon based energy sources grow and coal demand is throttled back.
On the Russia and Ukraine war, we expect, as it drags on, for supply chains to adapted to the new normal over time. This normalising should ease some of the current pressure on the thermal coal price in the months ahead.
The Daily chart for Whitehaven indicates 3 major trend advances have occurred, currently the price remains above the 200 day moving average but has moved below the 20 day moving average, signalling a loss of upward momentum
Into this environment pricing environment, Whitehaven Coal revelled, culminating in its 2022 full year result with records on every line. The only disappointment was Whitehaven Coal not being able to lever into such a strong pricing environment. Both managed and equity coal production fell in 2022 by 2.7% and 2.2% respectively year-on-year (yoy), to 20 million tonnes and 16.1 million tonnes.
Whitehaven Coal (ASX:WHC) is guiding 2023 managed and equity coal production to be in the range of 20.0 million to 22.0 million tonnes and for equity coal sales 14.1 million to 14.9 million tonnes.
Several key takeaways from Whitehaven Coal’s record 2022:
- Record revenue of US$4.9 billion – an increase of 216% yoy.
- EBITDA of US$3.1 billion – an increase of 1,396% yoy.
- Record Net profit of US$2.0 billion compared to a loss of US$543.9 million yoy.
- Net cash flow from operations of US$2.6 billion – up 1,753% yoy.
- A move to net cash, as of 30 June 2022, of US$1.0 billion compared to a net debt of US$809 million yoy.
We are pleased and expected Whitehaven Coal (ASX:WHC) would repair its balance sheet by taking advantage of the surging coal prices. We certainly have no concerns around its structure.
The Monthly chart of Whitehaven Coal indicates an exponential price trend developing. Currently, the price rejection at the $9.00 high, may indicate a further consolidation period is developing. Initial resistance developed at $6.00 during the past decade, may act as support if there is any further price decline
The standout for 2022 was Whitehaven Coal rewarding its shareholders with both a rise in the dividend and an on market buyback. First to the dividend, which saw shareholders receive a A48 cents per share fully franked dividend for the year compared to no dividend for 2021. The dividend was supported by a A$550 million buyback programme, to acquire up 10% of Whitehaven Coal’s issued shares. To date, Whitehaven Coal has acquired 7% of its issued capital for a spend of A$362.6 million at an average price of A$4.75 per share. We advocate buybacks, as they reward all shareholders permanently, albeit at a much slower pace, by increasing the share based metrics including earnings per share, net assets per share and dividends per share to name a few.
Market conditions have given Whitehaven Coal (ASX:WHC) a window of opportunity to turn around its fortunes and one it has grabbed with gusto. We expect market conditions around coal pricing will be more difficult some years out into the future, but current conditions have created the perfect tailwind and as we expected lifted Whitehaven Coals share price.
Given near-term market conditions, in our view, remain favourable for coal, we have rolled our half sell recommendation for Whitehaven Coal (ASX:WHC) back to a hold.Â
Disclaimer: Interest associated with Fat Prophets holds shares in Whitehaven Coal (ASX:WHC).
