Peabody sees sharp fall this year in U.S. coal market demand

Peabody Energy (NYSE: BTU) said it has cut its U.S. coal production forecast for 2012 due to a sharp market fall caused by factors like coal-to-gas switching by power generators and a mild winter that cut into the burn in a normally peak coal demand season.

Peabody did, on the other hand, report April 19 that it had first quarter 2012 EBITDA of $512.6m, an 18% increase over prior year levels. Income from continuing operations totaled $182.3m, with diluted earnings per share from continuing operations of $0.64. Adjusted diluted earnings per share totaled $0.67, compared with $0.72 in the prior year.

While Peabody is the largest U.S. coal producer by volume, it also has a major presence in the hot Australian coal industry, where strong Asian coal demand is generally, with some fluctuations, boosting coal prices and profits. Other U.S. coal producers, like CONSOL Energy (NYSE: CNX) and Patriot Coal (NYSE: CNX), have in recent weeks announced coal production cutbacks due to a sharp slump in domestic thermal coal demand and a cooling off of the recently hot coal export market. Peabody is the first U.S. coal producer to report first quarter results.

“Peabody delivered increased contributions from both Australian and U.S. mining operations,” said Peabody Chairman and CEO Gregory Boyce. “Our operations contributed higher revenues and margins per ton in all regions, demonstrating the strength of our diverse platform in the face of challenging conditions. Looking forward, our U.S. coal position remains fully priced for 2012, Australian thermal coal demand remains strong, and recent data suggest that metallurgical coal markets have stabilized with upside potential in the second half.”

First quarter revenues for Peabody rose 17% to $2.04bn, driven by a 27% increase in Australian revenues per ton and a 7% rise in U.S. revenues per ton.  Sales volumes in the first quarter of 61.7 million tons were above prior year sales of 61.2 million tons. 

U.S. revenues rose 5% in the first quarter, driven by higher realized prices in both the Midwestern and Western regions. Peabody runs the largest U.S. coal mine, North Antelope Rochelle, in the Wyoming Powder River Basin. U.S. shipments were largely in line with 2011 as the company only shipped to meet contractual commitments. U.S. Mining EBITDA rose 10% to $317.3m due to higher revenues and increased per-ton margins in both the West and Midwest.

“Lower U.S. coal-fueled generation related to mild weather and coal-to-gas switching has reduced U.S. coal demand,” Boyce noted. “During March, industry shipment reductions accelerated after a number of industry production curtailments were announced. Additional reductions are likely. Peabody is negotiating with select customers regarding reduced 2012 shipments and is lowering planned U.S. production.”

U.S. coal markets experienced first quarter declines in both consumption and production, with sharp declines in U.S. coal-fueled generation due to coal-to-gas switching, mild winter weather and low economic growth. Peabody estimates that first quarter total U.S. coal industry shipments declined 7%. Reductions accelerated throughout the quarter to an estimated 13% in March, which would equate to more than 140 million tons on an annualized basis.

The company estimates that U.S. coal-fueled electricity demand could decrease in excess of 100 million tons in 2012, with net U.S. coal exports increasing approximately 15 million tons to more than 110 million tons. Based on announced projects, U.S. export capacity could increase by more than 75% over the next five years to 250 million tons.

Peabody has reduced its targeted 2012 U.S. sales volume to 185 million to 195 million tons, with production fully priced. The company has 40% to 50% of planned production unpriced for 2013. Back in January, Peabody had been projecting U.S. sales in 2012 of 195 million to 205 million tons.

Peabody is targeting second quarter 2012 EBITDA in the range of $450m to $550m and adjusted diluted earnings per share of $0.40 to $0.65. Second quarter targets reflect expected lower realized metallurgical and thermal coal pricing along with reduced U.S. shipments.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.