Analysts expect U.S. coal companies to post higher earnings and revenue for the final quarter of 2021 due to higher prices and a bump in sales volumes compared with the year before.

In late 2021, U.S. miners reported selling much of the supply they planned to mine for the next several quarters as higher natural gas prices pushed up demand for coal. Still, investors will likely be awaiting updates on the impacts of rising inflation, ongoing labor struggles, progress on repairing balance sheets and, over the long term, the expected continued secular decline in the use of coal for power generation.

Analysts expect each of the eight publicly traded, U.S-based coal companies analyzed by S&P Global Market Intelligence to report higher revenue in the fourth quarter of 2021 compared with the same quarter of 2020. That is expected to lead to quarterly earnings per share increasing year over year for each company as well. In addition, analysts' consensus estimates project that all but one, Peabody Energy Corp., will report higher earnings per share in the fourth quarter of 2021 than for the previous quarter.

"They will get good results, revenuewise, but not so much on greater volumes," said Steve Piper, director of energy research at Market Intelligence. "Markets are starting to ease. Gas has moved back down, so spot coal will ease accordingly, but they are still at very healthy pricing levels and revenue levels."

While U.S. coal production rose in 2021 after a sharp decline in 2020, volume increases were limited due to labor shortages, decreased access to capital for new coal mine projects, uncertainty about future demand and other factors weighing on the sector. However, many producers reported being able to lock in longer-term deals, offering certainty around coal sales through 2022 and beyond.

During its third-quarter 2021 earnings report, Arch Resources Inc. reported selling out of thermal coal from its Powder River Basin mines in the Western U.S. for 2022 at "highly advantageous pricing." Peabody noted it had already sold most of its 2022 coal production from its Powder River Basin operations and was setting aside the remainder for utilities entering into multiyear contracts. Several other producers reported success in securing contracts into 2022 and a few years beyond as spot prices rose in late 2021.

Extending many of those deals much further out is unlikely, as many coal plant owners are contemplating the future of the facilities, while some coal mining companies may not be able to guarantee a longer-term supply, Piper said. If fuel prices remain high, that could also lower coal demand.

"As if coal needed any more demand destruction, this could really start to accelerate things," Piper said. "They'll take the revenues now, but they'd rather not see owners potentially accelerate plans to move away from coal as a result of the current pricing environment."

Rising cost pressure may offset some of the sentiment from improved contracting on upcoming earnings calls. For example, in its third-quarter earnings report, Alpha Metallurgical Resources offered cost guidance of between $73 and $77 per ton of metallurgical coal sold in 2021. The company reported at the time that it expects those costs to rise about 20% to between $88 and $92 per ton.

"Inflation is going to knock the hell out of their cost of production," said Matt Preston, research director for North American coal markets at Wood Mackenzie. "Those that jumped early in 2021 in terms of lining up long-term contracts may have settled for what would have seemed to be a pretty reasonable price, but now might look a little anemic given the current inflation pressures."

The challenge of rising materials costs could be exacerbated by troubles around attracting and maintaining employees, Preston said. Miners such as Alliance Resource Partners LP reported a focus on retaining and attracting employees to increase coal production to match demand in 2021.

Still, better pricing could temporarily alleviate the pressures on an industry that has seen a decade of demand loss, large bankruptcies and struggles with regulatory and policy restrictions.

"The near term looks a lot rosier," Preston said. "They will have a steady stream of cash, which is important these days, considering that it's very difficult to borrow money anymore."

The increased visibility into the near term offered by more extended contracts, in addition to higher prices domestically and abroad, has even led to some companies seeing improvements in their credit ratings. Several large publicly traded miners have had their outlooks revised to stable from negative, said Vania Dimova, a credit analyst at S&P Global Ratings. However, environmental concerns continue to weigh on the sector.

"We still have a view that coal plants are continuing to be retired and replaced by natural gas and renewable power plants," Dimova said. "With a high energy price environment, perhaps there's more of a delay, but that's kind of a short-term view. We still think that coal is on the secular decline."

The potential of a regulatory crackdown on coal-fired power plant emissions, coal ash storage or other attempts to regulate fossil fuels in the U.S. could accelerate the ongoing decline of the sector's customer base.

"It's going to get worse before it gets better," Piper said.