Peabody Energy (BTU, Financial) is facing the recent headwinds from the global decline in oil and gas prices. The latest asset sales in the commodities segment have led to a major fall in oil, iron ore and copper prices owing to the impact from the worldwide economic expansion and supply.
The international coal basics have also been undermined by weakening import demand, and mining and energy segment decline has further affected worldwide coal basics that have been weakened by robust seaborne provisions and weakening import demand.
Weak end-market performance
Regarding the metallurgical coal demand, Indian imports expanded approximately 20% during 2014 and are estimated to continue to expand with the growing economy and expanding infrastructure. In addition, the metallurgical coal import demand is estimated to grow with the progressing year. And with time Chinese seaborne demand is estimated to grow with the domestic production estimated to become rationalized and enhanced quantity of superior quality coal imports are needed.
The continued fall in the global oil, gas, iron ore and metallurgical coal prices is believed to significantly affect the mining major’s profitability and lead to a contracted top line growth.
Looking at the seaborne thermal coal markets scenario in China electricity demand expanded by 4%, coal imports fell in 2014, primarily due to constant coal production derived from improved hydropower capacity and loosened coal quality guidelines. The coal generation is believed to expand in 2015 while hydro development is estimated to hugely turn sluggish. The production of Coal in India increased 13% during 2014 with coal imports rising over 25 million tons owing to growing demand and wasteful local production. Thermal coal imports are believed to remain robust with the Indian government working closely to supply power to several other people.
A declining market
Moving ahead, the overall coal demand for the U.S. in 2015 is seen to be falling in 50 million to 60 million tons range owing to reduced natural gas prices. However, PRB coal demand is expected to remain competitive with natural gas making the PRB consumption increase to 20 million tons for this year. By 2017, Peabody forecasts an overall expansion in utility coal consumption in 10 million to 30 million ton range with coal consumption rebounding to about 40% of U.S. electricity. Also, Illinois and PRB Basin demand is estimated to expand by approximately 50 million to 70 million tons for this time.
The expansion in the coal demand for China, the U.S. and India is forecasted to be slightly offset by the global fall in the coal demand.
In Australia, robust operational initiatives resulted in impressive volumes for the previous year of 38.2 million tons, which comprises 13 million tons of thermal coal exports and 17.6 million tons of metallurgical coal sales. Further in the U.S., the company’s North Antelope Rochelle Mine in the PRB delivered a solid 119 million tons during 2014, making it the world’s major and highest productive surface mine.
Peabody is focused on significantly implementing the effective cost-cutting efforts in Australia and the U.S. It also established two innovative longwall systems at the North Goonyella and Metropolitan mines and continues to improve its mining methodology. At North Goonyella, the innovative longwall top coal caving system worked at enhanced levels after being completely built with second-half production rates enhancing approximately 100% throughout the first half.
The significant growth in the coal volumes for the key mines of the U.S., China and Australia is believed to drive greater production efficiency and improved shareholder returns.
Peabody started a 50-50 enterprise among Glencore's United Mine and Wambo Open-Cut Mine in New South Wales, Australia. This amalgamated company is estimated to start in 2017 and generate considerable synergies by enhancing productivity, reducing costs and widening the mine life.
In 2015, Peabody is believed to finalize the Gateway North extension. This key project is running much ahead of the schedule and estimated to get over during the first half of this year with the matching cost profile and volume similar to the existing mine.
The new joint venture and finalized Gateway North extension is forecast to deliver enhanced shareholder value and drive solid top line growth for the company.
Peabody is also improving its Wolf Creek extension discovery in Colorado, which is believed to broaden the life of its 20-mile mines at reduced production levels of about 4 million tons per year.
Moody’s downgraded the ratings of Peabody Energy Corporation that includes its Corporate Family Rating (CFR) to B2 from Ba3 with the ratings outlook to be negative owing to the lately decline in the company performance due to weakening market conditions.
The analysts seem to be worried about the declining global pricing environment, which is bound to badly affect the company’s growth outlook, going forward.
Unfavorable consensus
Peabody shares have declined by 47% for this year and stand at $10.35 currently. This seems to be highly disappointing, however; Peabody is in fact one of the superior performers compared with more than-50% declines at competitors Walter Energy, Alpha Natural Resources and Arch Coal.
Peabody is continually witnessing improved signs of revival with better supply and demand basics. Further, the company estimates the international coal demand to rise from 8.6 billion tons in 2013 to 9.3 billion tons in 2016, primarily driven by improved consumption from India and China.
The better performance of Peabody compared to its key competitors must attract the major stakeholders to choose the Peabody stock as a major investment destination.
Analysts at Jefferies downgraded Peabody Energy Corp. from “Buy” to “Hold” with the price target reduced to $6.00 from $10.00.
The consensus estimate among 23 polled investment analysts evaluating Peabody Energy Corporation suggests investors hold their positions in the stock. This consensus estimate is maintained since the investment analyst’s sentiments declined on Jan. 28, 2015. The earlier consensus estimate suggested the company to outperform the market.
The significant decline in the stock reputation among the key investors depicts the general impact of the overall weakening energy pricing environment.
Conclusion
Overall, investors are advised to avoid investments in the Peabody Energy Corporation looking at the disappointing company valuations. However, the PEG ratio of 0.09, below 1 depicts healthy company growth and comparable to the industry’s average of 0.11. Still, the profit margin of -11.69% indicates no profit but loss. Moreover, Peabody is hugely debt-laden with significant total debt of $5.99 billion compared to weak total cash of $309.20 million only, restricting the company to plan for future growth investments.
