Is Peabody Energy a Buy?

Peabody Energy (BTU) announced fourth quarter ended December 31, 2015 total revenue of $1.31 billion, down 22 percent year-over-year from $1.68 billion during the same period last year.

Peabody Energy declared fourth quarter of 2015 adjusted EBITDA of $53.0 million or adjusted diluted EPS loss of $9.27 per share, down 74.5 percent year-over-year from adjusted EBITDA of $207.7 million or adjusted diluted EPS loss of $18.18 per share in fourth quarter of 2014.

The coal production and distribution company reported continued year-over-year decline in both its top and bottom line primarily due to the ongoing weaker global commodity demand and pricing environment, negatively impacting the company’s key margins.

The positives

Peabody has shortened the duration of its currency hedging schedule with no extra currency hedges planned over the next one year and also no hedges during 2018.
Nearly $0.05 lowering of annual expenditures is estimated to generate $27 million of adjusted EBITDA gain during the second half of 2016 and a total $69 million gain during 2016. The company’s strategic fixed obligations are worth nearly $1 billion with LBA and VEBA payments due in late 2016 and during January 2017 respectively.

The coal mining and distribution company is continuously focused on minimizing the metallurgical segment costs per ton in Australia with significant upside potential while sustaining industry-leading and superior PRB gross margins compared to its peers.

The ongoing efforts of Peabody Energy towards controlling non-core expenditures, minimizing metallurgical segment costs per ton while impressively growing PRB gross margins compared to its major competitors is believed to drive significant and sustainable long-term company growth, delivering enhanced profitability and shareholder returns as the global commodity demand and pricing environment recovers notably and gradually.

A closer look

The tough near-term international coal markets are estimated to get better with time with significant catalysts for growth including, accelerated industrialization and urbanization in Asia with electricity and steel demand in SE Asia and India expected to grow the key demand for seaborne coal. The overall Chinese economy and huge property market seems to be stabilizing steadily by strategically working through the oversupply situation. The major production and investment decisions are also kept on hold.

However, the key coal demand in the U.S. is projected to fall in the range of 90 to 100 million tons with accelerated reduction in production and 8% year-till-date decline in shipments. Crucially, the key demand for ILB and PRB coal is projected to grow in the range of 35 to 50 million tons from 2015 till 2017 and primarily driven by improved capacity utilization of rest plants and basic cost benefits for the regions over several other U.S. basins.

Peabody Energy is focused on deleveraging and enhancing imminent liquidity with continued focus on near-term business growth requirements and prospective collateral obligations. Moreover, Peabody does not have any notable debt maturities till 2018 and the company is focused on strategic deleveraging through planned steps including, strategic debt exchanges/repurchases, enhancing coal markets, weaker capital expenditures, lowered cash spending and key proceeds from non-core asset sales.

Although lower natural gas prices are putting downward pressure on key coal demand as a commodity, still the longer term demand for coal in the U.S. and globally is projected to grow significantly and steadily compared to any other fuel coupled with positive impacts of Peabody Energy strengthening financial position which is believed to deliver sustainable long-term company’s profitability.

Peabody Energy recently signed a contract to sell its Colorado and New Mexico coal assets to Bowie Resource Partners, LLC at a price of $358 million all in cash which is in line with the company’s continued commitment for portfolio optimization.

Conclusion

Overall, the investors are advised to “Sell” any equity held in Peabody Energy Corporation considering its weaker financial position with significant total debt of $6.32 billion against weaker total cash position of $261.30 million only, restricting the company to continue with its daily operations profitably. The profit margin of -36.45% indicate no profit but loss. Further, the PEG ratio of 0.00 signifies no company growth.
Published on Mar 4, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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