Peabody Energy (NYSE: BTU), the nation’s largest coal producer, on Oct. 27 reported third quarter 2015 revenues of $1.42 billion and Adjusted EBITDA of $129.0 million.
After taking into effect the reverse split of common stock that occurred on Oct. 1, Diluted Loss Per Share from Continuing Operations totaled $(8.08) and Adjusted Diluted EPS totaled $(8.13).
“Peabody’s third quarter results reflect a solid operational performance across the portfolio that continues to limit the pricing impacts from unprecedented market conditions,” said Peabody Energy President and Chief Executive Officer Glenn Kellow. “Our mining platform is operating well, and we are balancing our dual financial objectives of optimizing liquidity in response to the prolonged industry downturn whilst keeping a strategic eye on deleveraging.”
Third quarter revenues totaled $1.42 billion compared with $1.72 billion in the prior year due to a 7 percent decline in volume and lower realized pricing. Third quarter Adjusted EBITDA of $129.0 million reflects approximately $200 million in lower operating and administrative costs that mitigated the impact of nearly $120 million in lower pricing and $123.7 million in hedging losses.
U.S. Mining Adjusted EBITDA declined $44.3 million to $238.0 million, primarily due to a volume reduction of 2.5 million tons largely driven by lower natural gas prices and a longwall move in Colorado. U.S. costs per ton declined 5 percent due to lower fuel expense, cost reduction initiatives and a higher mix of Powder River Basin (PRB) volumes, partially offset by higher overburden ratios. Third quarter PRB margins improved 5 percent to $3.39 as a result of higher revenues per ton on shipment mix and lower fuel prices.
Peabody has $187.6 million in PRB reserve installments and $135.7 million in interest payments remaining in the fourth quarter. The company is actively monitoring liquidity and any additional collateral required to support surety bonds, bank guarantees and other obligations.
Regarding the company’s $1.47 billion in self-bonding obligations as of Sept. 30, Peabody said it continues to qualify for self-bonding in all relevant states, has no collateral related to these obligations and recently received approval to continue self-bonding in New Mexico.
Global Coal Markets
“The broader commodity sector declined in the third quarter on concerns over slowing global growth and economic weakness in China,” said the company, which is also a major coal producer in Australia. “This resulted in a reduction in global coal demand that more than offset recent supply reductions and pressured seaborne coal prices.
“Seaborne metallurgical coal markets have been impacted by a 5 percent decline in domestic Chinese steel consumption through September as a result of a slowing economy and excess supply in the property sector. Chinese steel exports increased 27 percent to 83 million tons through September, and has reduced metallurgical coal demand in other regions. As a result, the fourth quarter metallurgical coal benchmark for premium hard coking coal declined 4 percent to $89 per tonne, and the benchmark for low-vol PCI eased from $73 to $71 per tonne, both the lowest levels since 2004.
“In seaborne thermal markets, India has surpassed China as the largest thermal coal importer. India’s 18 million tonne year-to-date increase in thermal coal imports has not been enough to offset China’s 59 million tonne decline through September. Chinese imports declined primarily from reduced coal generation demand, an increase in hydroelectric generation and protectionist policies that support domestic coal producers.
“Industry reports estimate that over 80 percent of seaborne metallurgical coal supply is not covering cash costs at current pricing, and Peabody projects 2015 seaborne metallurgical coal supply to decline 15 million tonnes to 295 million tonnes. U.S. metallurgical coal exports fell 17 percent through September and are expected to decline 10 to 15 million tons in 2015. Australian metallurgical exports have modestly increased compared with 2014 levels and benefit from lower currency, while domestic Chinese coal production is down 5 percent. Cutbacks have accelerated in the seaborne thermal market, particularly in the U.S. and Indonesia, where exports are down 39 percent and 8 percent, respectively.
“Peabody expects additional coal production curtailments in response to current prices. In addition, limited capital spending is anticipated to act as a future supply constraint. Industry reports indicate a 70 percent decline in capital investment from the top coal producers from recent highs in 2012. The company anticipates that coal prices will need to rise well above current levels to incentivize new investment to maintain adequate supply to meet seaborne demand over time.”
U.S. Coal Markets
“Within U.S. coal markets, Peabody now projects utility coal demand to decline approximately 100 million tons in 2015, primarily due to lower natural gas prices, with coal’s share of U.S. electricity generation expected to be 35 percent,” said Peabody. “U.S. coal shipments are projected to decline 90 million tons this year, and additional production cutbacks are expected. The largest share of production decreases is occurring in coal regions outside of the PRB, where demand pressures are the greatest. The reduction in demand has currently outpaced the supply response, resulting in rising stockpiles totaling approximately 75 days of supply in the PRB and approximately 90 days in the Illinois Basin.
“Peabody expects 2016 utility coal consumption to be below 2015 levels based on current natural gas prices and expected plant closures; these factors more than offset higher capacity utilization within the remaining U.S. coal fleet. Over the next few years, the company projects rising coal demand over 2015 levels as natural gas prices increase on growing LNG exports, onshore demand and pipeline exports to Mexico. The PRB remains most competitive with natural gas and is expected to represent a greater share of the U.S. coal generation profile in coming years due to its delivered cost advantages and emissions benefits.
Peabody making moves to tough out the depressed market
“Peabody benefits from an unmatched global asset base, strong underlying operational performance and our mines are strategically positioned to access the best markets,” said Kellow. “The company continues to navigate the current environment with a fresh perspective and an intense focus on the operational, organizational, portfolio and financial areas of our business.”
- Operational – Peabody is benefitting from recent cost reduction initiatives while transforming operations to respond to market conditions. These initiatives have allowed the company to reduce its annual Australian metallurgical coal production while lowering unit costs by modifying production plans and increasing productivity. The company’s operational results reflect consistent performance with four out of five operating segments reporting average gross margins of 26 percent in the third quarter.
- Organizational – The company has successfully completed a series of actions aimed at creating a leaner organizational structure at the administrative level, including salaried workforce reductions, streamlined reporting, activity consolidation and shared service development. As a result of these initiatives, third quarter SG&A declined 29 percent year-over-year and reached the lowest level in nearly a decade.
- Portfolio – Peabody has a substantial asset base that provides option value to hold for development, transfer into joint venture opportunities or monetize. The company evaluates potential asset sales through several criteria including strategic fit, value consideration, potential growth and cash requirements. Peabody said it is currently advancing multiple asset sale processes, which includes non-core assets and certain operating mines.
- Financial – The company continues to focus on optimizing liquidity in light of ongoing business requirements and potential collateral obligations while pursuing deleveraging. Peabody’s potential avenues for deleveraging include asset sales, continued focus on cash outlays from cost or capital management, rising cash flow from any eventual market improvements, and potential debt buybacks or exchanges. In addition, Peabody recently implemented a reverse stock split of the company’s common stock following approval by approximately 90 percent of voted shares.
Peabody’s 2015 U.S. production is fully priced with 2016 U.S. production approximately 15 percent unpriced based on assumed 2016 production levels, which are expected to be modestly below revised 2015 targets. Peabody now has 113 million tons of PRB priced at an average of $13.67 for 2016 delivery.
After working with customers to defer shipments into 2016, the company reduced 2015 U.S. sales volumes by 5 million tons. 2015 Australian costs per ton are now targeted to be nearly 25 percent below 2014 levels as a result of lower currency, fuel rates, productivity improvements and operational changes. Peabody also expects 2015 capital spending and Selling and Administrative Expense to be approximately 25 percent lower than 2014 levels.
Peabody has issued new 2015 sales guidance for its U.S. operations of 175 million to 185 million tons, down from prior guidance of 180 million to 190 million tons.
St. Louis-based Peabody Energy is the world’s largest private-sector coal company, with major U.S. operations in the PRB (including the giant North Antelope Rochelle surface mine) and the Illinois Basin.