Peabody Energy Comes Back to (Public) Life

Company focusing on debt reduction post-bankruptcy

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Apr 13, 2017
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Peabody Energy (BTU, Financial)(BTUUQ, Financial), the largest U.S. coal producer, recently emerged from bankruptcy. According to Reuters, the company was not able to service its $10.1 billion debt when it filed for bankruptcy protection in April 2016.

Peabody will focus on reducing debt, targeting high-return investments and returning cash to shareholders over time, CEO Glenn Kellow said.

In review, Peabody Energy and a majority of its wholly owned domestic subsidiaries as well as one international subsidiary in Gibraltar filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the U.S. Code (the Bankruptcy Code) on April 13, 2016.

Peabody’s Australian operations and other international subsidiaries are not included in the filings.

Earnings performance

In fiscal 2016, Peabody Energy experienced 15.9% sales decline to $4.72 billion and $739.8 million net loss attributable to common stockholders compared to $2 billion losses in fiscal 2015.

Peabody explained that sales decline was "primarily due to lower realized pricing in the U.S. and internationally and lower sales volumes driven by the demand and production factors" mentioned in its filings.

Valuations

With a market capitalization of $512.9 million or $27.74 per share, the company had a price-book (P/B) value of 1.51 times compared to its industry peer median of 18 times –Â GuruFocus data. The coal company also had price-sales (P/S) ratio of 0.11 times vs. industry median 1.4 times.

Using average fiscal 2017 sales and earnings-per-share figures from Reuters, Peabody had forward sales and price-earnings (P/E) multiples of 0.1 times and 6.59 times.

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(10-K)

Peabody Energy

Peabody Energy was founded 134 years ago and is the world’s largest private-sector coal company by volume. In 2016, Peabody produced and sold 175.6 million and 186.8 million tons of coal –Â an 18.4% decline from 2015.

In 2016, 76% of Peabody’s total sales (in volume) were to U.S. electricity generators, 21% were to customers outside the U.S. and 3% were to the U.S. industrial sector.

According to company filings, Peabody owns interests in 23 coal mining operations located in the U.S. and Australia. In addition to Peabody’s mining operations, the company markets and brokers coal from other coal producers, both as principal and agent, and trades coal and freight-related contracts through trading and business offices in Australia, China, Germany, the United Kingdom and the U.S.

Peabody Energy conducts its business through six operating segments: Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining and Trading and Brokerage.

The principal business of Peabody’s mining segments in the U.S. is the mining, preparation and sale of thermal coal, sold primarily to electric utilities in the U.S. under long-term contracts with a portion sold into the seaborne markets as market conditions warrant.

Peabody’s business of the Australian operating platform is primarily export focused with customers spread across several countries while a portion of the metallurgical and thermal coal is sold within Australia.

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(10-K)

Powder River Basin Mining

Powder River Basin Mining operations consist of its mines in Wyoming. The mines in that segment are characterized by surface mining extraction processes, coal with a lower sulfur content and Btu and higher customer transportation costs (due to longer shipping distances).

The company's Powder River Basin Mining operations mine sub-bituminous coal deposits.

In 2016, the segment’s sales fell by 21% to $1.47 billion – 31.2% (largest) of total Peabody Energy sales  and delivered an adjusted EBITDA margin* of 25.8% compared to 25.9% in 2015.

*Peabody Energy: The company’s chief operating decision maker uses adjusted EBITDA as the primary metric to measure the segments' operating performance. Adjusted EBITDA is defined as (loss) income from continuing operations before deducting net interest expense, income taxes, asset retirement obligation expense, depreciation, depletion and amortization and reorganization items, net. Adjusted EBITDA is also adjusted for the discrete items, which are reflected in the reconciliation below, that management excluded in analyzing the segments' operating performance.

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(10-K)

Midwestern U.S. Mining

Midwestern U.S. Mining operations include the company’s Illinois and Indiana mining operations, which are characterized by a mix of surface and underground mining extraction processes, coal with a higher sulfur content and Btu and lower customer transportation costs (due to shorter shipping distances).

In addition, Midwestern U.S. Mining operations mine bituminous coal deposits.

In 2016, sales fell 19.2% to $792.5 million – 16.8% of total sales  and had an adjusted EBITDA margin of 27.4% – the highest margin among segments – compared to 27.5% in 2015.

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(10-K)

Western U.S. Mining

Western U.S. Mining operations reflect the aggregation of the New Mexico, Arizona and Colorado mining operations. The mines in that segment are characterized by a mix of surface and underground mining extraction processes, coal with a midrange sulfur content and Btu.

Further, the Western U.S. Mining operations mine both bituminous and sub-bituminous coal deposits.

In 2016, Western U.S. Mining sales fell by 22.9% to $526 million –Â 11.2% of total sales. The segment delivered an adjusted EBITDA margin of 19.3% compared to 27.1% in 2015.

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(10-K)

Australian Metallurgical Mining

Australian Metallurgical Mining operations consist of mines in Queensland and one in New South Wales, Australia. The mines in that segment are characterized by both surface and underground extraction processes used to mine various qualities of metallurgical coal (low-sulfur, high Btu coal).

The metallurgical coal qualities include hard coking coal, semihard coking coal, semisoft coking coal and low volatile pulverized coal injection coal.

In 2016, Australian Metallurgical Mining sales fell by 7.7% to $1.09 billion –Â 23.1% of total sales. The division also delivered an adjusted EBITDA loss of $16.3 million compared to $18.2 million in losses in 2015.

According to filings, the weak performance in the division was secondary to unfavorable volume and mix variances. Further, the volume decrease (in the segment) reflected lower sales volumes from Queensland mines due to weather impacts and lower production at Peabody’s North Goonyella Mine resulting from a longwall move and a significant geological event that resulted in the cessation of the current longwall top coal caving system –Â this will result in the mine operating conventional longwall equipment for at least the remainder of the current panel.

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(10-K)

Australian Thermal Mining

The company's Australian Thermal Mining operations consist of mines in New South Wales, Australia. The mines in that segment are characterized by both surface and underground extraction processes used to mine low-sulfur, high Btu thermal coal**.

**A small portion of the coal mined by the Australian Metallurgical Mining segment is of a thermal grade. Similarly, a small portion of the coal mined by the Australian Thermal Mining segment is of a metallurgical grade.

In 2016, Australian Thermal Mining sales grew 0.2% to $824.9 million –Â 17.5% of total sales. The unit also delivered an adjusted EBITDA margin of 26.4% compared to 23.5% in 2015.

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(10-K)

Trading and Brokerage

Peabody’s Trading and Brokerage segment engages in the direct and brokered trading of coal and freight-related contracts through its trading and business offices.

In 2016, Trading and Brokerage sales fell incredibly by 125.5% to negative $10.9 million and also delivered an adjusted EBITDA loss of $72.2 million compared to $27 million gains in 2015.

Peabody noted that the significant sales decline was secondary to lower physical volumes shipped due to the impact of depressed coal pricing and unfavorable mark-to-market earnings from financial contract trading activities.

Nonetheless, Peabody expects a significant portion of the unfavorable mark-to-market earnings to be offset in future periods upon the delivery of physical shipments that economically hedge the financial positions that related to the losses.

Revenue and net income (loss)

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(10-K)

Cash, debt and book value

As of December, Peabody had $872 million in cash and cash equivalents and $20.2 million in debt having a debt-equity ratio of 0.06 times compared to 6.4 times in 2015**.

**As per filing, the coal company had $3 billion in total liabilities not subject to compromise and $8.44 billion liabilities subject to compromise.

The company carried no goodwill or intangibles in its $11.8 billion assets and had a book value of $337.8 million compared to $918.5 million in 2015.

Cash flow

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(10-K)

In 2016, Peabody had negative $52.8 million in cash flow from operations brought by several cash outflow from loss from equity affiliates, voluntary employee beneficiary association settlement, settlement of hedge positions, restricted cash, accounts receivable, among others.

Peabody Energy also gathered $144.4 million in disposal of assets, net notes of receivables and $2.9 million from joint venture distributions, net contributions made.

Capital expenditures were $132.7 million leaving Peabody with $185.5 million free cash outflow. In addition, the company also allocated $249 million in federal coal lease expenditures.

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(10-K)

Peabody halted its dividend payouts in fiscal 2016 after paying out $1.4 million the year prior. The coal company also generated $913.7 million in debt proceeds net repayments and costs.

Conclusion

To say that 2016 was a difficult year for Peabody Energy is an understatement. Nonetheless, the largest coal producer finally emerged from its heavily leveraged balance sheet.

Peabody’s 2016 operations reflected weak results in terms of sales and profits, while the company racked up good amount of debt proceeds.

Nonetheless, asking a 70% margin from Peabody’s peer median P/S multiple for fiscal 2016 results would indicate a value of $1.98 billion or $107 a share –Â 283% upside from $27.98.

In summary, Peabody Energy is a speculative buy with a target price of at least $50 per share.

Disclosure: I have shares in Peabody Energy.

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