Peabody Energy Corp. (BTU, Financial) has seen huge gains recently due to the European energy crisis caused by the ongoing conflict between Russia and Ukraine. The war has boosted demand for coal, Peabody's main product. Peabody is well-positioned to take advantage of this situation thanks to its vast network of mines, strategic partnerships with top industry leaders and focus on cutting-edge technologies that help improve efficiency and reduce waste.
Peabody's third-quarter earnings report showed significant growth over the same quarter of last year, proving how lucrative this market has become. The company's success demonstrates how even challenging economic conditions can create new opportunities for some businesses. As one of the leading coal producers in the world, Peabody can capitalize on this opportunity and continue its meteoric rise in the short-term, though investors should note that the coal bull market will not last forever.
About Peabody
Peabody was founded in 1883 and has a long history of innovation. The company's innovations include the first successful underground longwall mining operation, the first-ever continuous miner, the first-ever self-loading, low-sulfur coal preparation plant and the world's largest underground coal gasification project.
Peabody has grown to be one of the biggest names in the coal industry, thanks to its diverse portfolio and strong revenue from mining operations in both the U.S. and Australia. The company's offerings include seaborne thermal coal, seaborne metallurgical coal, U.S. thermal coal and Powder River Basin (PRB) coal. Peabody has managed to maintain its position as a key player in the industry despite fluctuating market trends due to its ability to operate efficiently and maintain a strong balance sheet.
The Russia-Ukraine war proves a boon to coal
The invasion by Russia into Ukraine has caused an energy crisis in Europe that led to increased demand for coal as countries looked for alternate sources of fuel. The war has spurred record peaks in coal prices around the world. According to the World Energy Outlook 2022 by the International Energy Agency (IEA), rising coal prices directly resulted from the natural gas shortage in Europe due to the conflict.
Overall, the war has had far-reaching consequences not just politically and socially but also economically regarding energy markets and fossil fuel prices. The European Union, which imports much of its natural gas from Russia, decided to sanction Russian natural gas exports. As a result, many abandoned coal-fired plants across Europe suddenly found themselves in business again. Analysts from the IEA estimate that the overall demand for coal will grow by 0.7% to 8 billion tonnes worldwide in 2022 compared to 2021.
The bottom line is that the demand for coal is resounding across the global market. Many factors, including the recent spike in inflation and ongoing geopolitical tensions, are driving this resurgence in coal consumption. Despite predictions that this growth will be short-lived, Peabody has been able to capitalize on these conditions by reducing its debt by over $200 million in the past year. With coal projected to remain a top global energy source for the foreseeable future, Peabody Energy looks well-positioned to succeed in this challenging marketplace.
Peabody delivers in the third quarter
Peabody recently reported an exceptional third quarter. In particular, the company's GAAP earnings per share were over six times higher than in the same period last year, with adjusted Ebitda that comfortably exceeded analyst estimates. Furthermore, Peabody's operating cash flow and free cash flow showed significant growth compared to the third quarter, indicating robust financial health overall. Lastly, the company recorded a healthy cash position of over $1.4 billion at the end of September.
Peabody focuses on both high-quality thermal and metallurgical coal. The company sold 32.7 million tons of coal in the third quarter, representing a 4 million ton increase compared to the previous quarter. The company's coal production was divided across several different markets, including the PRB (or Powder River Basin) region in the U.S., which delivered over 22 million tons in the third quarter. Peabody also sold 4.8 million tons of other U.S. thermal coal, 3.7 million tons of seaborne thermal coal and 1.8 million tons of seaborne metallurgical coal during this period.
In addition to its successful coal production business, Peabody is also making strides in reducing its overall debt load. In the third quarter alone, Peabody retired over $186 million in secured debt, and it plans to continue this strategy over the next 12 months using various debt reduction efforts. Furthermore, Peabody still has $143 million worth of Wilpinjong 10% secured debt that it plans to repurchase soon. This careful control of its balance sheet is what has helped the company survive and thrive to this day.
The North Goonyella investment is a wild card
To solidify its position in the Asian markets, Peabody has set its sights on the North Goonyella mine, an extensive deposit of hard-coking coal that boasts more than 70 million tons of reserves.
With abundant access to a valuable and sought-after resource like North Goonyella, Peabody hopes to position itself for success in the years ahead. Thanks to the mine's existing infrastructure and equipment, Peabody is confident that it is key to growth in the Asian market. Indeed, Peabody's longwall mining techniques have already proven successful at North Goonyella, indicating that this mine may be just what the company needs to secure its leading position in this competitive industry.
Takeaway
With a supportive market, Peabody's strong fundamentals, leading industry position and high operational efficiency are allowing it to reap huge profits. As such, I believe the company could represent an excellent short-term investment opportunity for those seeking to play the coal bull market.
