Coal demand, as well as prices, had a surprisingly strong year in 2021. The trend is thought to be just a temporary bounce on the way to industry-wide demise.
Peabody re-emerged from insolvency, after the shale boom killed coal demand, as low natural gas prices killed US coal demand.
It initially re-emerged within a still tough business environment for coal. Last year however there was a shift that could lead to robust US & Global coal demand this decade.
Peabody needs to show that it can operate profitably and that it can effectively manage its debt situation if it is to profit from the favorable market environment.
Satephoto/iStock via Getty Images
Investment thesis: Peabody (BTU) emerged from bankruptcy in 2017, after becoming insolvent in 2016, mostly due to a sharp decline in coal prices, in large part caused by the shale boom that flooded the US market with natural gas last decade. Since its stock started trading again in 2017, it has declined by more than half, as of right now, mostly due to the fact that until last year, coal prices remained subdued. Furthermore, a deep general public conviction has emerged in regards to coal being on its way to becoming history as a source of energy, first and foremost in the Western World, but eventually even in the developing world. It is hard to be bullish on any company that belongs to an industry that is perceived to be in imminent demise. And yet, just in the past few months, a clearer view of the global energy situation emerged, which suggests that the recent improvement in coal demand and prices is not just a temporary reversal from coal's imminent terminal path. The US & global fundamentals are looking much-improved this decade for the coal industry. It is up to Peabody to now show that it can take advantage and produce some positive financial results. There is a good chance that it will.
Peabody's recent financial results are not overly encouraging.
For the first nine months of 2021, Peabody's financial performance has been less than stellar. It incurred a loss of $153 million, on revenues of just over $2 billion. It is a huge improvement on 2020 results, when it incurred $1.7 billion in losses, in large part due to the exceptionally tough economic situation we experienced that year. It is nevertheless still a loss when the market conditions have been exceptionally good for coal miners. Of note, interest expenses came in at $143 million, which is equivalent to just over 7% of revenues. As I pointed out on numerous occasions, I see interest costs at over 5% of revenues to be concerning for commodities miners.
Of note, Peabody's long-term debt did decline from $1.5 billion at the end of last year, to $1.27 billion as of the end of the third quarter of last year. The amount of cash on hand also declined by a similar number for the same period as did the debt, which suggests that there has not been a very significant net improvement in its financial situation. This is something that we need to start seeing if Peabody is to see a significant improvement in its market valuation.
One of the reasons why Peabody is not seen to be improving its overall financial performance enough to get into profits territory is because the increase in the price of coal in 2021 is not fully reflected in its realized price.
Even though coal prices advanced significantly in 2021 compared with previous years, there was no increase in the average realized price compared with 2020.
Clearly, Peabody's contracting did not pan out favorably, given that coal prices were so high last year. Hopefully, it will be able to take advantage of higher prices going forward, assuming that higher coal prices will persist.
The coal market has a strong chance of participating in overall bullish trends for commodities this decade.
Goldman Sachs is reported to be forecasting a commodities bull market for this decade. There is of course nothing to guarantee that all commodities will participate. Coal is seen as a top contender to not make the cut in this regard because it is after all the top villain in the climate change story. It is not all just about climate change either. China has had to curb its coal demand growth in an effort to keep its population from choking on the smog that all its coal-fired powerplants have been spewing. China currently consumes about half of all coal mined on this planet, and it is looking to increase its reliance on natural gas and renewables in an effort to clean up the air, especially near its larger urban areas.
US coal demand and production plummeted in the past decade, mostly due to the flood of cheap natural gas courtesy of the shale boom, but also due to other factors. Shale producers collectively lost money last decade and many drilled themselves and their peers into bankruptcy, along with coal producers that were also undermined by the low price of natural gas. The massive displacement that took place was one of the most important energy trends of the last decade.
US Coal Versus Natural Gas Demand ChartEIA
There were many other factors that also contributed to the dramatic decline in US coal demand last decade. There was an increase in renewable energy supply. There was also the sluggish performance of US industrial output, including steel production which peaked in 2008. For reference, every trillion cubic feet of natural gas can displace 36 million tons of coal. So the increase in US natural gas demand since 2008 is equivalent to 260 million tons of coal. Not all the increase in natural gas demand served to displace coal demand, but most of it did.
Aside from displacing coal demand domestically, the growth in US natural gas production last decade played a significant role in dampening global coal demand. Just before the shale boom, LNG receiving terminals were being planned in expectation of a US natural gas supply shortfall. Those import terminal plans turned into LNG export terminals, and America is now the largest exporter of LNG. A massive differential in the price of gas opened up last year between North America and the Old World, which looks to become a persistent situation, making LNG exports potentially profitable for years to come. At the same time, US natural gas production has been stagnant for about two years now, making it a potentially bullish situation for US natural gas prices. As long as natural gas prices remain elevated, there is more incentive to use coal instead of natural gas. That is something that seems to be happening already in response to the higher cost of natural gas this year.
As long as US natural gas prices continue to remain robust, there are reasons to be bullish on US coal prices as well. It remains to be seen to what extent Peabody can take advantage of the favorable market situation in order to solidify its financial position and start showing profits. Given the positive external situation, there are reasons to expect a positive outcome for Peabody and its financial results in upcoming quarters and years. There is still the risk that it will not be enough for Peabody to successfully navigate the company back to financial health. In the longer term, the coal industry will again come under increased pressure, as the green shift will eventually put global coal demand on an irreversible path of demand decline. This means that Peabody needs to shore up its business in the next few years because times will get hard again for coal producers. While there are all these risks and uncertainties, it is nevertheless a compelling investment opportunity. For this reason, I decided to take a small position in Peabody stock. If trends will continue to favor coal and Peabody in particular, I might take another nibble soon.
My name is Zoltan Ban, I have a BA in economics. I am a personal investor with over a decade and a half of active trading experience.
Follow
Disclosure: I/we have a beneficial long position in the shares of BTU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
LikeSaveShareCommentGet alerts onBTU - Peabody Energy CorporationFollow33.23K FollowersRecommended For YouComments (10)NewestPublishFred VenetteToday, 1:08 PMPremiumComments (5)lDoesn't look like much short interest at about 5%? But that was in Dec. Volcano activity does not suggest extended cold.ReplyLikeOoakraidToday, 6:48 AMComments (911)Thank you for the article. With Shoal Creek restarted, and ramping, the metal coal sales will improve in a favorable market. They have already renewed some steam coal contracts at higher prices, and probably more since the last CC. It will be interesting where the PRB has been priced at for 2022; should know after the earnings upcoming. They have stated that debt paydown is the priority, and that is wise. Their cash flow for 2022 should be outstanding. A key you point out is the management, which in recent history has been terrible. It does seem that the newer people they have installed are better, and much more responsible to the longer- term shareholder interests. The weather may have started to turn to the colder cycles, which always happens over history. This is a wild card which some may be overlooking. Here is the US, the climate hustlers have had their sway with the uninitiated in recent years; we will see how things play out going forward. For now, these guys need to think on similar lines managing the business as the cigarette manufacturers have done.ReplyLike(3)Sam DNAYesterday, 8:45 PMComments (114)COAL FACT, BRIEFLY:Without coal there would be NO electric vehicles. Think of all those steel machines that make the EV parts, body, frame, and even the wheels and the steel belts in the tires and the steel wire making the bead holding the tires in the rims. There would no copper because of all the steel equipment to mine copper ore and refine it, and then move it to where it is needed. Trucks, trains, tracks, safety equipment, giant mining machines, smelters. And then there all the steel towers carrying the electric grid, switch yard equipment, and the trucks and machines to build power lines and maintain them. With out coal, there is no steel. Without steel there are no EV charging stations.You cannot have an electric vehicle without a lot of coal used to make all that steel.Shall we start talking about all the rebar in the bridges, buildings, homes, and household appliances we use?To claim we can eliminate the use of coal is clearly scientifically silly. PS This doesn't even begin to go into stuff like billions of people freezing their buttafookoes off. And being hot in the summer. Without Coal.ReplyLike(4)HhudoclanYesterday, 7:01 PMComments (48)I have written many times re Peabody. The reality is they are 100% tied to the coal market as a sole commodity player. The long term coal price is around 75, drops to about 50 as the floor and then there are short term spikes caused by supply / demand imbalances typically driven by gas supply and price or political influences from the likes of China. Most of BTU coal is sold on long term contracts with only a portion exposed to the highs and lows. But as the above article describes, BTU struggles to make money even in "good" years. Debt is still too high and seemingly no change in the company strategy despite a change in management.In an economy where coal use is in long term decline (whether your a climate change believer or not this is just reality) BTU will not survive without a change in strategy and it baffles me why they continue to double down on coal rather than diversify into other "energy" commodities like Copper / Nickle / Lithium etc which is the only long term option for the company to be around in 10-20 years.If you have spare cash and want to speculate on the Coal price, BTU might be a play for you. But it is speculative and very high risk. Might be better going to Vegas and putting your money on black for a safer return.ReplyLike(1)Zoltan BanYesterday, 8:09 PMContributorPremiumComments (2.25K)@hudoclan Thank you for your comment. It is true that coal demand will continue to decline in the longer term, although perhaps not by as much as is being anticipated and not as fast. Right now, it is experiencing a bit of a comeback, mostly because there is not as much natural gas to go around as the global market wishes to have. This comeback may persist for longer than anticipated as well. You are right, there is a lot of risk on this one. But it is a lot of risk that is already priced in, while potential upsides in coming quarters and years are being largely dismissed, due in large part to expectations of the industry's imminent demise.ReplyLike(3)BBondsYield - CFAToday, 6:33 AMComments (252)@hudoclan BTU trades at x1 EV/EBITDA and with all that FCF coming, its likely that you ll get your money back multiple times before coal cease to exist, which is unlikely to happen before 2040 despite mainstream media want you to believe.ReplyLike(6)Jay14150Today, 10:38 AMComments (689)@Zoltan Ban@hudoclan Hello, Commenters have previously stated that Asian exports from Australia will be the main business driver, taking advantage of a host of frequently shifting supply issues.While that topic is worth a deep dive, my question concerns the US's thermal business. Some commenters believe it doesn't count in the scheme of things:Starting from Jan 1st 2022:They will be losing 5% of their US Thermal customer base by year end 2022,9-10% by year end 2023.17.5% by year end 2025.These figures are cumulative starting from Jan 1st. 2022.Do you believe these losses are material or immaterial to Peabody, and why or why not?ThanksReplyLike
#139103
Re: Cobas AM: Nueva Gestora de Francisco García Paramés
Ceropatatero
Calla y disimula, que cada vez que nos ven alegres, el enemigo contraataca.
A ver si llegamos a 100 y entonces se podría hacer una de estas dos cosas: *tirarse por la borda y abandonar el barco. *preparar una estrategia para abordar más altas cotas. 👍🏻
#139104
Re: Cobas AM: Nueva Gestora de Francisco García Paramés
Buenas, Sólo por confirmar... el D6 pasó a la historia, no? Ya no se presenta, verdad? Saludos
