Commodities & Metals

Peabody Energy Stock Makes a Run After Awful Earnings

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When Peabody Energy Corp. (NYSE: BTU) reported second-quarter results Tuesday morning, the per share loss was worse than expected and total sales came in lower than expected. But the company is still in business, and investors bid the shares up nearly 6% after touching a new 52-week low of $0.99.

Analysts had been expecting a per share loss of $0.61 and Peabody’s adjusted loss per share was $0.65. Asset impairments totaling $3.06 per share pushed the GAAP net loss to $3.71 per share. The impairment charge totaled $901 million of which $719 million was related to Australian metallurgical coal assets and $182 million was related to U.S. assets held for sales.

Peabody had two issues: low prices and weak demand. Pricing for both U.S. coal and seaborne coal declined, reflecting a weak global economy, weak demand for steel, and low natural gas prices. Peabody responded by cutting production.

The amount of coal used to generate U.S. electricity declined by 14% through June directly as a result of low natural gas prices. The U.S. coal supply dropped by 13% in the second quarter and Peabody expects additional production cuts in the second half of the year.

The recent U.S. Supreme Court ruling invalidating U.S. Environmental Protection Agency rules regulating power plant emissions is a procedural victory only for the industry. Peabody said in its earnings announcement today that the Supreme Court ruling “is not expected to materially impact planned plant closures or near-term coal demand.” At least the company is being realistic.

Here’s what Peabody sees through 2017:

By 2017, Peabody expects that approximately 55 gigawatts of U.S. coal-fueled generation will retire, with the majority occurring in 2015, and that 250 gigawatts of coal-fueled generation will remain online.  While total U.S. utility coal demand is expected to decline approximately 30 to 50 million tons between 2014 and 2017 on lower assumed natural gas prices, PRB and Illinois Basin demand is expected to more than overcome 2015 declines by 2017 as these regions retain a fundamental delivered cost advantage over other U.S. coal basins.

Energy producer CONSOL Energy Inc. (NYSE: CNX) also reported results this morning and the natural gas and coal producer took an asset impairment charge of $829 million, again primarily related to low commodity prices.

Peabody is planning to survive by shifting its focus to the lower production cost of Powder River Basin coal. CONSOL has diversified into natural gas, but suffers from low prices on both coal and natural gas. One or both may survive, but it is difficult to see either thriving again.Peabody’s shares are trading up more than 6% in the mid-afternoon on Tuesday at $1.13 in a 52-week range of $0.99 to $16.71. The consensus price target on the stock is $5.13.

CONSOL’s stock traded up about 3.7% at $17.99 in a 52-week range of $15.47 to $42.26. The consensus price target on the stock is $32.50.

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