Low coal prices have been the major culprit behind a waning coal industry. Peabody Energy Corporation (NYSE:BTU), the world’s largest private coal company, has been no exception to the declining coal sector. On July 3, 2013, Peabody’s shares closed at a mere $14.65, showing a 43% fall on a year-over-year basis.
With Peabody Energy Corporation (NYSE:BTU)’s share price plummeting, two key questions come into mind: Has Peabody Energy bottomed out? When will it rise again?
Limits on Carbon dioxide emissions
In order to combat long-term effects of global warming, President Obama put limits on carbon dioxide emissions from power plants. This would help in reducing carbon emissions by 17% from 2005 to 2020.
This new rule means higher operating costs for coal power plants. Hence, the power generating companies would be hesitant using coal for electricity purposes. As a result, natural gas would be the likeyl choice for the energy industry going forward. Peabody Energy Corporation (NYSE:BTU), being the largest private sector coal company in the world, is bound to be affected by this regulation. Preference of natural gas over coal for power generation would further weaken coal’s demand and price, which would have an adverse effect on the company’s revenue.
Peabody slashes Australian jobs
In an attempt to lower operating costs, Peabody Energy Corporation (NYSE:BTU) plans on cutting 450 contractual jobs at its Australian mines. According to Peabody’s President, Charles Meintjes, “(Contractors have) traditionally been an area of high spend for the company and as a result we will be reducing approximately 450 contractor positions at our mines over the coming weeks.” These job cuts are expected to take place in Queensland and New South Wales, where both thermal and coking coal is produced.
This latest move suggests that Peabody Energy Corporation (NYSE:BTU)’s management doesn’t expect coal prices to recover in the near future, which is yet another setback for the company.
Australian Dollar and Peabody Energy
For the last couple of years, a strong Australian dollar (AUD) meant high operating costs for Peabody Energy in Australia. Conversely, a weak U.S. dollar (USD) resulted in lower revenue for the company. However, during the last three months, AUD has lost almost 10% of its value, relative to the USD. This comes as a relief for Peabody Energy Corporation (NYSE:BTU), which has a major group of coal mines in the region, as a strong USD would translate into more revenue for the company.
EIA energy outlook
The only good news for the coal industry comes from the U.S. Energy Information Administration’s outlook for 2013. According to EIA, U.S. coal consumption will grow 7.1% in 2013 amid higher electricity demand and higher gas prices.
In 2012, mild winter was one of the core reasons behind low natural gas prices in the U.S. In 2013, normal temperatures are expected in most parts of country, which would drive gas prices in the winter season. This would make coal-fired electricity a preferred choice for power generators, creating more demand for thermal coal during winters.
Valuation
Peabody is trading at a forward P/E of 14.95 times and is yielding a dividend of 2.30%. The company’s latest quarterly results depict that its sales went down almost 14% on YOY basis. For the year, sales (ttm) have gone down 4.5% in comparison to the previous year. A beta of 1.52 reflects that the company is hugely cyclical and moves in accordance with market conditions. Peabody’s ROE of -12.69%, in comparison to industry’s ROE of -8.49%, is a testimony to this. The company’s price-to-book value (P/BV) of 0.81 states that it is trading at a price that is almost 20% less than its intrinsic value.
The bulls are of the view that, since Peabody is trading far below its book value, it has almost bottomed out. But, the fact is that, if coal prices don’t recover in the near future, Peabody’s share price has nowhere but to go down further.
