Coal companies seem to be having pretty rough going for some time now and stocks of many companies, like Peabody Energy Corporation (BTU, Financial), the world’s largest private sector coal company, have been trending downward for years now. Peabody has seen an almost constant decline in prices for over four years now, losing over 90% value since the peak in 2011. Meanwhile, shares of a more diversified competitor like CONSOL Energy Inc. (CNX, Financial) have lost, in comparison, only 10% value in the same period. Both the increasing availability of cost effective renewable energy and toughening regulations surrounding coal use are creating strong headwinds for the coal industry. Given the size of Peabody as a player in the industry and the continued dominance of the energy market by coal and other fossil fuels, can Peabody ride out the current negatives?
Positive factors
As is the case with oil prices, one of the big reasons why coal prices have tumbled in the last few years is the availability of cheap natural gas. However, according to some analysts, natural gas price is bound to go up sooner rather than later due to reduced supply, and hence, increased demand. This will have a positive impact on the demand, and consequently the price, of coal.
The slowdown in China is a big factor affecting Peabody, which has a significant international presence. The company’s Australian division, responsible for shipping coal to China and also to India, the region’s other growth powerhouse, is sure to benefit once the Chinese economy picks up again. The quality of coal mined from Australia is superior to other coal from the region, and both the Chinese and the Indian economies are still very heavily reliant on coal for their energy needs.
Many analysts also hold the view that coal, and Peabody specifically, is a good bet because coal prices have bottomed out and they can only go back up now. At historical lows for both the price of coal and of shares of coal companies, any further downside seems to be severely limited.
The negative factors
Non-traditional sources of energy, including natural gas and the obvious renewables, are still a small chunk of the global energy market but are certain to grow by leaps and bounds in the future. As technology to harness power more efficiently from these sources gets developed, they are going to garner bigger shares of energy production. Countries like India and China, while still heavily reliant on coal, have plans to invest billions of dollars in solar power generation over the next decade or so.
Stricter regulations around the world about emission regulations and the fact that coal is more polluting than even other fossil fuels doesn’t help the cause of coal either. A new law in the U.S. could also dramatically affect coal companies, especially Peabody, by charging much higher royalty fees for coal mined from federal lands.
There is still a lot of excess coal capacity in the market today, and hence, there is no guarantee of prices recovering any time soon. Even if demand goes up, prices could still lay low for some time as the demand and supply equation comes close to balancing itself out.
Management moves
Last month, the company announced that its current CEO Gregory Boyce and his elected successor Glenn Kellow will both take temporary salary cuts in the second half of this year. This could be seen as a bid, even if gimmicky, by the senior management to reduce costs for the company that is struggling with losses, and could hence provide investors some confidence about the management’s seriousness to change things.
However, the recent strange call from Gregory Boyce to the Congress, asking for continued investment in ‘clean coal’ as a way to tackle the U.S.’ electricity crisis’ that will also help the transition to a low carbon economy sounds like a lot of hogwash. When management makes blatantly false-sounding public statements of this sort, it becomes difficult to take it seriously.
Conclusion
If the coal market was to turn around, and that is a big if, Peabody might be one of the companies that will stand to gain. But there is no guarantee of either the industry turning around any time soon, or of Peabody benefitting from it. Unless you are convinced about a rosy future of the coal industry, you should stay away from this stock. And investors who already own the stock are urged to cut their losses and SELL this stock.
