Peabody Energy: Are There Any Positives?

Due to end market weakness, Peabody Energy (BTU) shares have faced a lot of pressure in the past year. This is because the weakness in the coal market has weighed heavily on the company’s financial performance. For example, last quarter, the company’s top line was down 24% year-over-year and its net loss widened to $1.04 billion from just $71.2 million in the second quarter of 2014.

Weakness across the board

A significant decline in the energy major’s top line and bottom line is primarily attributable to a 16% decline in volume and weaker realized pricing during the quarter.
Peabody had reported total Australian volumes of 8.6 million tons that includes 4.1 million tons of metallurgical coal having an average realized cost of $79.16 and approximately 2.8 million tons of export thermal coal priced at $54.70 per ton, with the outstanding 1.7 million tons produced under domestic thermal agreements.

Peabody also posted negative operating cash flow of $59.8 million that includes $8.2 million linked to make-whole premiums from the retreat of the outstanding 2016 Senior Notes, whereas capital expenditure stood at $25.8 million. Peabody declared total cash balance of $487.1 million by the end of June 2015, with overall liquidity of about $2.1 billion that includes $1.5 billion accessible under the company's completely dedicated credit facility.

The company’s continued declining cash position is mainly due to unfavorable global commodity pricing environment forcing Peabody to control costs and capital expenditures.

Positives to watch

Coal demand for India and China is estimated to grow at an accelerated pace going forward. Seaborne metallurgical coal demand from China and India almost tripled from 2008 till 2013. Although coal demand growth in China got suspended in 2014 however, healthy growth in India partly balanced declines. India is believed to import a major portion of its met coal demand owing to weaker domestic sources. Accelerated rate of urbanization and solid economic growth is forecasted to drive significant met coal import demand by 2017.

However, U.S. coal demand in 2015 is expected to contract by 80 to 100 million tons with accelerating curtailments in production. PRB coal inventories grew to 70 days of supply owing to weaker demand and enhanced rail performance.

Natural gas is seen to be quickly replacing coal for the U.S. 2015 estimated electricity generation. However, demand for metallurgical coal in India and China is believed to remain strong with impressively growing import of the key resource in the countries.

Now, coal is believed to be the world’s fastest expanding key fuel for this century. In addition, over 75 million people are estimated to be added to cities every year till 2020 accelerating improved infrastructure and energy demands and coal being the least expensive and highly reliable source for electricity generation expected to meet expanding demand.

Don’t ignore the negatives

Standard & Poor's Ratings Services recently downgraded its corporate credit rating on Peabody Energy Corp. to 'B' from 'BB-' with a stable outlook primarily driven by the fact that coal industry operating conditions will remain weak during 2015 with pricing for met coal contracting greater than the expectations.

A majority of the key investment analysts are negative about the growth prospects of Peabody Energy primarily driven by the ongoing weaker global commodity pricing environment, widening the losses for the company.

Hence, even though there are certain positives about Peabody Energy, I think it will be wise for investors to stay away from the stock for the time being.
Published on Sep 29, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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