U.S. coal companies are bracing for an already tough 2020 to get even worse under pressure from the economic impact of the COVID-19 pandemic.

Investors accustomed to seeing larger coal companies returning capital through shareholder value initiatives were already seeing companies back off those efforts in the face of weakening markets ahead of the outbreak. Now, companies are borrowing cash from their available financial facilities, lowering production and taking other measures to shore up liquidity in the face of a potential global recession.

"I don't think we're ready to say that this is the death blow for any of our rated companies that remain, but for some of the unrated companies, I really do wonder," said Benjamin Nelson, a lead coal analyst with Moody's Investors Service. "Companies that were small to start with, probably didn't have a lot of liquidity, do they get through this? It's an open question."

Metallurgical coal producer Contura Energy Inc. announced March 23 that it drew down $57.5 million under its revolving credit facility as a precautionary measure. Peabody Energy Corp., the largest coal mining company in the U.S., recently said it borrowed $300 million under its $565 million revolving credit facility "to ensure ample financial flexibility in light of current global market uncertainty caused by COVID-19."

"Peabody has a strong liquidity position, and a large U.S. contracted sales position," the company said in an email.

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Nelson said revolver draws are no surprise. Companies took a similar approach to the 2008 financial crisis. However, he said, back then most companies had a better sense of how to cap their downside risk. Now companies do not know how long the outbreak could last, how governments might respond, or how either factor might impact power generators and steel producers' demand for coal.

"I think there's a lot more question marks out there today," Nelson said. "Typically, when companies are uncertain, they tend to batten down the hatches and build liquidity to the extent possible."

While U.S. thermal coal producers may have a tough time regardless, there could be opportunities for metallurgical coal producers. Prices have remained weak in recent weeks but could become a hot commodity if world governments respond with stimulus packages encouraging steel production.

"While the near-term risks remain for seaborne prices, we continue to believe that met coal is among the best-positioned commodities for a post-COVID-19 recovery and we recommend investors overweight exposure to high-quality, low cost met coal producers (with no liquidity risks)," B. Riley FBR analyst Lucas Pipes wrote in an April 7 note.

However, like most of the economy, a cloud of uncertainty looms over the coal sector.

"Typically, you would be seeing guidance, but it's too early to tell with things changing very quickly," said Chiza Vitta, director of S&P Global Ratings. "Nobody knows what's going to happen. In a lot of cases, people have said they can't offer any guidance, and if they can, certainly not very far out."

Coal producers are vulnerable because a secular decline in demand and low prices mean limited access to revenue. However, producers have also already done a lot of the work to tighten their belts, Vitta added. Even before the virus began to affect the global economy, coal companies were plagued by crashing stock prices as the sector faced stiff competition from other fuels, and investors increasingly screen coal companies out of their investments.

In recent weeks, several companies pointed to COVID-19 as they announced production cuts, including Blackhawk Mining LLC, Contura Energy Inc. and Rhino Resource Partners LP. Murray Energy Corp., the largest privately held coal miner in the U.S., recently told the bankruptcy court that the pandemic's impact threatens the company's available liquidity as it tries to complete a court-supervised restructuring.

Alliance Resource Partners LP, seen by many as one the most financially stable coal producers in the U.S., stopped production at its Illinois Basin coal facilities. Only a few months ago, the low-cost producer was talking about capturing the market share of its competitors. Now Alliance said it expects its total sales tons for 2020 to be approximately 25% below initial expectations, and it suspended its cash distribution to unit holders for the first quarter.

It is still too early to sort out exactly how much impact the outbreak will have on utility demand for coal, said Steve Piper, director of energy research for S&P Global Market Intelligence. However, it appears to be substantial, and that is likely to put downward pressure on coal prices.

"The problem producers have is that they really can't cut their prices very much at this point," Piper said. "They're pretty much as close to their cash cost of operation as they can get. It's been that way, with brief exceptions, for the last two or three years. So even as that natural gas price grinds lower and displaces more tonnage, coal producers simply aren't able to respond with corresponding price cuts to maintain the generation viability of their customer coal plants."

Based on federal estimates, U.S. quarterly coal production fell to a 40-year low, S&P Global Market Intelligence reported in an April 6 coal sector outlook. Coal shipments fell to an average of 10.5 million tons for the four weeks ended March 21, 19.8% below March 2019.

Utilities were already planning to retire more coal plants, but Piper said the virus could pull forward levels of decline in the sector that were not expected to hit until 2021. The already-exposed coal industry could take the hit from an economic recession even harder than other areas of the economy.

"Where we were in the 475 million ton to 485 million ton range [for annual U.S. utility coal demand], we could see that — with the exposure to natural gas prices and a now reduced electricity demand picture — could see volumes this year approach 400 million tons," Piper said.