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Peabody Energy Feels the Heat of Low Price & Shipments



September 7, 2019 - Peabody Energy Corporation has announced that third-quarter performance will deteriorate from the second quarter due to reduced pricing for seaborne met and thermal coal shipments, and deferrals on seaborne thermal and met coal shipments. In addition, delay in resuming and ramping up production at the independently operated Middlemount joint venture mine will have an adverse impact on its third-quarter earnings.

Coal Continues to Lose Ground

U.S. coal companies are gradually losing ground, as natural gas and renewable energy are preferred over coal for energy needs. This shift in loyalty is primarily due to growing concerns about rising emissions, and effects of pollution on human growth and development. The latest report from U.S. Energy Information Administration (“EIA”) forecasts U.S. coal consumption in 2019 to fall to 589 million short tons (MMst), indicating a 14.3% decline from the 2018 levels, and the same to further drop to 575.7 MMst in 2020.

The gradual fall in demand in the U.S. electric utility sector is a primary cause of declining demand for coal. In addition, a drop in U.S. coal exports is hurting the prospects of coal companies. EIA projects that coal exports from the United States will drop 13.5% to 100 MMst in 2019 from 115.6 MMst a year ago. U.S. coal exports are expected to further drop to 90.4 MMst in 2020.

Per EIA, almost 13 gigawatts of coal-fired electricity generation capacity has retired this year or is scheduled to retire by the end of 2020, accounting for 5% of the existing capacity at the end of 2018. Utilities like Xcel Energy XEL and American Electric Power AEP, among others, have plans to shut down coal-operated generation units and replace them with clean sources.

What is the Way Out?

There is no denial that the coal industry is currently going through a difficult period and the new administration doing its bit to support the industry. The Trump administration clearly has a pro-coal stance, with the Environmental Protection Agency coming up with an Affordable Clean Energy proposal to replace the stringent Clean Power Plan. Trump also decided to exit the Paris Climate Agreement to promote usage of coal and revive the industry.

Despite the new administration’s pro-coal stance, increasing usage of clean natural gas and renewable sources is alarming for the U.S. coal mine operators. Peabody Energy and Arch Coal Inc. ARCH have decided to form a joint venture by merging some of their most-productive coal mines in Powder River Basin and Colorado. The aim of the JV is to combine best productive assets of both the companies and reduce costs beyond the capacity of a single company to achieve.

The joint venture of the top two operators in the U.S. Coal industry could be the way forward for the troubled coal companies. This JV is expected to unlock a pre-tax synergy of $820 million and average joint venture synergies are projected to be nearly $120 million per year over the initial 10 years.

Price Performance

Shares of Peabody Energy have underperformed its industry in the past three months.