U.S. coal producers’ credit quality has generally stabilized over the past two years as companies focus on shareholder returns and increased capital spending after many producers cleansed the debt from their balance sheets through bankruptcy restructurings.

Improved pricing, particularly for coal destined for export markets, has added to the sector’s improved financial condition despite expectations of a continued secular decline in demand for domestic thermal coal. Among some of the top-ranked U.S. coal miners, according to an S&P Global Market Intelligence analysis using a tool called the credit health panel, are companies that either recently went through a bankruptcy reorganization such as Peabody Energy Corp. or were spun out of bankruptcy reorganizations of their predecessors, as is the case with Warrior Met Coal Inc. and Contura Energy Inc.

“The big story for 2018 was the favorable export market both for thermal and metallurgical coal,” said Vania Dimova, associate director of S&P Global Ratings’ natural resources group, in an interview. “That definitely impacted the credit health of U.S.-based coal companies. We see the credit quality stabilizing in 2018 and 2019 as they continue to strengthen their balance sheets.”

Bankruptcy restructurings have continued for some in the sector. Thermal coal producer Westmoreland Coal Co. and metallurgical coal producer Mission Coal Co. LLC are both in the middle of bankruptcy reorganizations. But generally, U.S. coal companies have benefited by taking advantage of export markets.

“Exports have proven critical to coal producers as domestic power plants, which increasingly use natural gas for fuel, have sharply cut their coal purchases, leading to deteriorating credit metrics, disappearing profits, and in some cases, bankruptcy for coal companies over the past few years,” S&P Global Ratings wrote in a late October note on the sector. “Even though credit quality is stabilizing due to conservative financial policies post-restructuring and growth in export sales, access to capital is waning, particularly for thermal producers.”

S&P Global Ratings also forecast average adjusted debt in the sector to continue to decline in 2018 and 2019 as cash flows from export sales are used to repay debt. The sector is also assumed to hike average capital spending by about 40% in 2018 as U.S.-based producers resume replacement and rebuild programs that were put off in 2017, the note said.

Individual credit health panel scores can be used as a tool for assessing a company’s financial health but do not tell the entire story.

For example, Cloud Peak Energy Inc. is in the bottom half of creditworthiness among peers, but not the bottom quarter despite recently announcing operating challenges and plans to consider strategic options for the company’s assets, including a potential sale. Foresight Energy LP scores in the bottom quartile overall and on each of the operational, solvency and liquidity metrics even though export business for Foresight and controlling owner Murray Energy Corp. has been growing cash flows and contributing to high sales margins.

“Murray has sufficient headroom for prices to drop more than 35% from current levels before the company breaks even on its exports, and Foresight could see prices fall by more than 45% before breakeven thanks to one of the lowest-cost mining operations in the U.S.,” S&P Global Ratings wrote in the October note.

With so much reliance on exports, some coal company investors may be hesitant over concerns the good fortune could be disrupted. Charles Dayton, vice president for market analytics at Doyle Trading Consultants, recently said he expects coal exports to peak in 2018 as he watches “storm clouds” for U.S. producers in the form of recent economic activity in Germany and Japan.

Chiza Vitta, director of S&P Global Ratings’ natural resources group, said the last time exports spiked around 2012, there was a very drastic drop-off for U.S. producers. If demand drops again, he said, U.S. producers could be affected differently because sector conditions have changed.

“There are some preferred providers, so there are different levels of sensitivity,” Vitta said. “What we’ll be watching out for is whether the U.S. is a little less sensitive to drops. In other words, are they the first producer to go or is there some stickiness with their customers?”

Moody’s recently said the outlook for U.S. coal is stable as EBITDA is projected to remain relatively flat or grow roughly in line with inflation. The Dec. 12 analysis suggested regulatory pressures and uncertainty around the coal industry will continue to limit coal investments as cash goes back into investors’ pockets instead of into developing new mines.

In a late November note, Moody’s vice president and senior credit officer Benjamin Nelson wrote that a modest improvement in credit quality across the sector, reflected in Moody’s ratings actions since early 2017, stems from significant reductions in debt, non-debt liabilities, or operating risk through the bankruptcy process.

“We expect that coal producers will continue to direct a significant portion of operating cash flow toward shareholder returns at least through 2019, rather than growth capital investment and debt reduction that could improve credit quality,” Nelson wrote. “Over the longer term, we anticipate that secular decline in the demand for thermal coal will continue to pressure profitability in the industry and shareholder returns will taper down accordingly.”

The credit health panel is an S&P Global Market Intelligence tool that evaluates the creditworthiness of a chosen company relative to a unique group of industry peers. This analysis uses financial data from the 12-month period ending Sept. 30. The methodology for determining a relative credit health score is available here.

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