Coal Bankruptcy Fears Stoked, but China Risk Is Bigger (Update 1)

"Aside from JRCC, the remaining companies in our coverage universe are not faced with significant bankruptcy risks over the next several quarters," wrote Haberlin in a note to clients.

The prospect of slowing growth in China and lower steel demand removing the largest marginal buyer of met coal has Haberlin more concerned. Haberlin and other coal analysts recently cut earnings expectations throughout the sector. Nevertheless, investors may still focus on whether companies revise met coal guidance -- of if earnings will slump faster than expectations.

"Into earnings we think estimates are too generous for more met-focused Alpha Natural Resources and Walter Energy and too tough for Consol Energy(CNX) , given its restart of higher profit low-vol met coal production at Buchanan," wrote Bank of America Merrill Lynch analyst Timna Tanners in a July 17 earnings outlook.

"Despite near-term met concerns, we remain convinced that the market remains robust longer term given limited supply globally and high production costs," adds Tanners.

Benchmark met coal prices rebounded from $210/metric ton in the second quarter to $225/mt in the third quarter, according to Haberlin's report. However, prices are now likely headed lower due to increased supply, declining global steel production, and a slower global macro environment, the Davenport analyst wrote in his July 18 earnings outlook. Haberlin recommends buying Peabody Energy shares after he cut its 2012 earnings per share estimate and noted the prospect of a $150 million Patriot Coal-related loss.

Met coal exports within UBS analysts' coverage increased roughly 12% in June and thermal exports were up 287%. Year-to-date, UBS analysts also note that thermal exports are up 16%, with shipments to China and India up 97% and 63%, respectively. Interestingly, it was now-bankrupt Patriot Coal which has led the way with an 86% increase in coal exports, the UBS analysts noted.

In spite of Patriot's July 9 bankruptcy, Raymond James analyst Jim Rollyson has a view of coal stocks that implies bankruptcy is not a legitimate near-term risk for most of the major players and may unduly scare investors off opportunity.

"I think the stocks are factoring in quite a bit lower outlook than we are expecting," Rollyson said. He expects Cloud Peak to come out of earnings relatively unscathed and sees the prospect for optimistic commentary from James River and Alpha Natural Resources that could drive shares higher.