I will have to review the new report dated 12/6 with the previous one dated 9/6 to see changes. BTU had a positive EPS surprise last qtr and valueline kept the 2 for Timeliness for the 12/6 report. The time to buy is now as there is going to be very nice EPS growth in 2014 and 2015. Especially with the low # of outstanding shares $270M. When the report is totally bullish the PPS would have already made its move.
India and Chrina are the drivers
Patience wins with BTU
Sentiment: Strong Buy
I have learned very hard to buy at the low - patience wins. Especially with a Best of Breed company in the industry with conservative mgmt. The outstanding share count is low so when they turn the corner the EPS growth will create a nice pop.
Sentiment: Strong Buy
The take away from the article:
the share of coal power in China’s overall energy use is expected to drop from around 70% in 2012 to 44% in 2030, according to a Bloomberg New Energy Finance Report. Despite this, because China’s overall energy use will also be growing rapidly, China’s coal consumption in absolute terms will continue to grow rapidly at least through 2022.
China's rapid growth will more than make up for the slowing of coal in the USA. Plus it is going to be 10 degrees in New England tomorrow. Burn that coal !!!
Sentiment: Strong Buy
It’s hard to see how China’s energy consumption patterns can mesh with global efforts to prevent climate change. China’s coal use is certainly at odds with Christiana Figueres’ call for coal companies to begin closing “subcritical plants” and to leave existing coal reserves untapped. China’s leaders have taken action to stem the problem, but they are unlikely to severely cripple China’s energy growth in order to meet global emissions targets. And that is exactly what U.S. coal companies want to hear.
Ironically, only a few weeks before the UN convened its Climate Change Conference in Warsaw, Beijing was hosting a very different sort of international meeting — the China Coal and Mining Expo. The U.S. Department of Commerce and the West Virginia Development Office are both listed as supporters of the event. The global coal industry, where China and the United States enjoy one of their most productive partnerships, soldiers on.
As natural gas becomes increasingly plentiful in the U.S., coal is losing ground. Coal’s share in U.S. electricity generation dropped from 50% in 2007 to 27% in 2012. At the same time, stricter emissions regulations are making it harder to sell coal to Europe, which has traditionally been the largest destination for U.S. coal exports. Based on these two trends, the IEA warned in late 2012 that “large shares of coal production in the U.S. will eventually become unprofitable.” This could translate to thousands of layoffs, particularly in coal-rich regions such as Appalachia. To prevent lost income and lost jobs, coal companies are increasingly turning towards exports, and particularly towards China.
As a result, the total value of U.S. exports of metallurgical coal to China skyrocketed from $138,000 in 2008 to over $975 million in 2012. To add perspective, U.S. exports of metallurgical coal to China averaged a total value of $110,000 per year from 2005-2008, then increased by ten-fold to reach $110 million in 2009. With the United States and Europe cutting back on coal, U.S. coal companies are aggressively expanding their exports to China, hoping that China’s growing energy demands will keep them in business. It’s potentially life-saving for U.S. coal industry, but could have deadly consequences for the Chinese and global environment.
China currently uses coal to provide about 70% of its energy. Its increasing energy demands forced China to become a net importer of coal in 2009, despite the country’s own rich coal deposits. Yet the Chinese government is aware of the environmental consequences of coal use. Over-reliance on coal not only causes heavy air pollution, but also strains China’s already limited water supply.
China’s 12th Five-Year Plan laid the groundwork for reducing reliance on coal both by increasing the efficiency of existing and future coal plants and by investing more in alternate power sources such as renewable energy and gas. As these changes take place, the share of coal power in China’s overall energy use is expected to drop from around 70% in 2012 to 44% in 2030, according to a Bloomberg New Energy Finance Report. Despite this, because China’s overall energy use will also be growing rapidly, China’s coal consumption in absolute terms will continue to grow rapidly at least through 2022.
How US Companies Benefit From China’s Coal Addiction
China’s reliance on coal has serious environmental consequences, but is keeping U.S. companies in business.
By Shannon Tiezzi
November 21, 2013
On November 18, Executive Secretary of the UN Convention on Climate Change Christiana Figueres delivered an ultimatum to coal industry leaders: change or go out of business. Speaking at the Coal and Climate Summit in Warsaw, Poland, Figueres insisted that the coal industry needs to remodel itself in order to prevent disastrous levels of global warming. She warned coal companies to “anticipate increasing regulation, growing finance restrictions and diminishing public acceptance.” Worse, at least from the perspective of coal companies, Figueres recommended that the existing coal reserves should be left in the ground. Unwelcome news indeed for coal tycoons — and for both China and the United States.
While China and the U.S. disagree on many issues, they share a strong interest in the coal industry. They are the top two producers and consumers of coal in the world, with China leading in both categories. Yet the two countries’ coal consumption is diverging rapidly. In 2011, China accounted for 47% of world coal consumption, with the U.S. in a distant second at 12%. Between 2008 and 2012, China’s coal consumption increased by 34% while the U.S.’s went down by 20%. According to the International Energy Agency (IEA), U.S. coal consumption is projected to fall by 14% between 2011 and 2017. Meanwhile, China’s coal consumption is expected to double between 2011 and 2035, as China’s overall energy use continues its rapid rise.
Based on these figures, it might seem that the two countries no longer share a common interest in coal. However, changes in global coal consumption have only tightened the ties between the U.S. coal industry and China. (cont)
Tepco, Mitsubishi plan coal-fired power plants at Fukushima
November 23, 2013 11:40pm
TOKYO - The operator of Japan's wrecked nuclear plant and three Mitsubishi group firms plan to build a new type of energy-efficient coal-fired power plants in Fukushima, a source said on Saturday.
Tokyo Electric Power Co will tie up with Mitsubishi Heavy Industries, Mitsubishi Corp and Mitsubishi Electric to build integrated gasification combined-cycle (IGCC) stations.
Mitsubishi group companies will have a majority of stake in the new plants while cash-strapped Tepco will be in charge of running the facilities, which they plan to put online around 2020, the source said.
Tepco has been under pressure to introduce energy-efficient facilities as all of its nuclear power plants have been closed since the Fukushima disaster, with no immediate prospects of restarting any nuclear plants given public distrust.
Mitsubishi Heavy also aims to be a leading player in the new IGCC technology, which will increase power output by 20 percent from conventional coal power plants, using the same amount of fuel.
Three reactors suffered core meltdowns at the Fukushima Daiichi plant north of Tokyo after the March 2011 earthquake and tsunami that triggered explosions and forced the evacuation of 160,000 people from nearby towns and villages. — Reuters
Sentiment: Strong Buy
Peabody Energy: Goldman Sachs Upgrades Shares, Sees 30% Upside
By Ben Levisohn
For investors who bought shares of Peabody Energy (BTU) at the beginning of the year, its shares have been like a lump of coal in Christmas stocking. But Goldman Sachs sees a much happier outcome in the future.
Goldman Sachs’ positive view on some coal stocks comes as Credit Suisse reassesses refiners.
Goldman analyst Neil Mehta and Vinit Joshi explain why they raised their rating on shares of Peabody Energy:
We upgrade shares of Peabody Energy (BTU) to Buy from Neutral with 31% total return (including dividends) to our 6-month target price of $26. Four factors underpin our positive view of BTU: (1) the potential for continued cost cutting and volume growth in Australia, (2) the bottoming in met coal prices, (3) improving cash flow and (4) attractive relative and absolute valuation. Even after outperformance in the last three months, BTU has still lagged the S&P500 by over 50% in the last 12 months and 110% in the last 3 years.
Mehta and Joshi also took a look at what they see as the big themes in the coal sector: Cost cutting, restructuring and balance sheets. They make some recommendations:
Own cost-cutting winners, including Buy-rated BTU. Other companies with strong
cost control potential include Neutral-rated [Walter Energy (WLT) and Alpha Natural Resources (ANR).]
Buy restructuring stories, including Buy-rated [SunCoke Energy (SXC)]. We see high potential that SXC drops down coke-making assets from the parent to its MLP in 1Q2014, as suggested by management commentary.
Avoid companies with weaker balance sheets, including Sell-rated [Arch Coal (ACI)].
Peabody has gained 3.7% to $20.81, Walter has risen 7% to $18.57, Alpha Natural has advanced 4.3% to $7.99, SunCoke is up 3.3% at $21.24, and even Arch Coal is surging: It’s gained 6.4% to $4.48.
Sentiment: Strong Buy
In conclusion, I want to point out that all the main ingredients needed to give rise to a trend which will in the next few decades test the economic price ceiling of coal are in place. Demand for coal will be there as I pointed out through my analysis of its main substitute, natural gas. The marginal price of coal production is rising at a relatively fast pace, just as it did in the case of crude oil in the last decade. The fact that current rate of coal production price increase may be an indication of coal reserves being overstated gives us the scarcity factor. Therefore, I believe that for those who have the time and patience to allow for returns to come in, this is a good time to start looking at taking positions directly or indirectly in coal mining activity related investment opportunities. There is no rush to jump in, but it is time to start contemplating the best ways to play this for the long term.
What all these data tell us is that the marginal price of coal is on the rise and it is currently rising fast. It is in many ways no different than the rise we saw in oil, where the marginal price was in the $15-$20 in the 1990s while now it is in the $80-120 range. In other words we need the current price in order to keep the world economy supplied.
I do believe that the ceiling price is much higher than current marginal production price. We could absorb a doubling or even tripling of coal prices in current dollars, without suffering an economic meltdown. The question I have however is whether such a price increase will be enough to lead to our ability to extract the estimated trillion-ton reserve we currently assume to have based on official estimates such as the ones we have courtesy of the EIA and BP. The fact that the marginal cost of production is increasing so rapidly in many major coal producing regions tells me that perhaps large volumes of the supposed reserves are not going to be economically recoverable even if we can sustain a tripling of the spot price for coal in the next few decades. In other worlds, just as crude oil that would currently cost over $200 per barrel to produce, will likely remain in the ground forever, so will all the tons of coal which may be more expensive to recover than our maximum acceptable price which we can sustain given our economic needs. The fast-paced increase in costs of coal production we are currently witnessing suggests to me that we in fact do not have more than 100 years worth of coal reserves at current consumption rates as mainstream establishments currently suggest.
Part one of this two part series as well as the beginning of this article focused on establishing that the demand for coal is going to be there, mainly because of the supply/demand picture of coal's main substitute, natural gas. There is no question that demand for coal will be there in my view, in the absence of extreme global economic hardship. As I pointed out in the first article, I expect an increase in demand by about 3 billion tons per year by 2040 on top of current demand of about 9 billion tons per year.
The number one factor in delivering a continually increasing supply of global coal is price of production versus the maximum price tolerance of the market. We now know the price of oil can go for a sustained period over $100 a barrel, but not over $120, before demand destruction in the form of a struggling economy starts to set in. For coal, it is hard to determine with precision what is the maximum achievable price level within the economy. It is something we will only learn about when we get there.
What we do know right now is that the average cost of coal production in many major producing regions is rising dramatically. In Australia, for instance production costs since 2006 rose by 71% in Australian dollar terms (link). The cost of coal production in the United States has doubled since 2000 according to EIA data. The EIA expects that from now on cost of production will only increase by about 1.5% per year adjusted for inflation. The average marginal cost of production in China is thought to be in the $80-100 range. Current thermal coal spot price is around $55 (link), which means that the Chinese are already producing major quantities of coal at a loss.
We should also remember that there is global steel production, which currently takes up about 750 million tons of coking coal annually. Steel demand is set to rise by about 3% in the short-term (link) and coal demand will likely rise accordingly. If the trend holds for the next few decades, this alone could add almost billion tons per year worth of global coal demand by 2040.
In the end, electricity production is where the bulk of potential demand for coal will come from. In this article I pointed out a roughly 55 trillion cubic feet potential demand for natural gas, which has not been accounted for in the forecast to 2040 and therefore can mean an equivalent of two billion tons of additional coal per year needed for electricity generation. Some may be tempted to claim that natural gas can take care of all of it. Extra transportation fuel as well as keep up with global electricity demand are easy tasks for natural gas, now that we have fracking as a way to get it out of the ground. I do not believe that to be the case. I also believe that we are a bit overoptimistic on coal supplies as well, which reinforces my view that coal is a good potential long-term investment, given that there are some potential scarcity issues. We shall leave the details to part two of the series as we examine supplies of coal and gas.
It is within this context that we have to view the future of coal. Its main substitute in electricity generation is natural gas, while natural gas is the closest substitute for oil. It is currently a much-coveted substitute, because it is cleaner burning at a similar price. Politicians as well as firms looking to meet CO2 reduction goals are eager to take advantage of such a favorable, costless way of showing a green streak. It remains to be seen however if this option will continue to be available in the longer term, or whether we will reach a point in the not too distant future when the trend will be reversed. For this article, we established that natural gas will likely have other major sources of demand, which currently are not being factored in due to an over-reliance on optimistic forecasts about future oil production prospects. Exxon did not consider this factor when it forecast coal demand to remain largely flat for the next few decades.
Coal demand will not be flat, in fact I expect it will become the number one source of energy by 2040, while natural gas will come in second. Oil will fall from number one to the third spot, mainly as a result of production constraints, which will create a huge shift in resource allocation. In order to figure out the actual size of this shift we have to look at the supply side of the equation, which I reserved for part two of this two part series.
For now we can already see other sources of demand however. Coal to liquids (CTL) will become more popular with countries wishing to convert their coal reserves into liquid fuels. China is going ahead with adding CTL capacity. Construction for a plant started in September, which will have a capacity of four million tons per year (link). Other plants around the world, including in the United States will most likely be built in the years and decades to come.
On the plus side for Peabody shareholders, the low price environment is leading other coal miners to shut high cost mines and drop production in the U.S. At the same time, 2013 Asian demand for coal is rising better than +10% year over year, with demand for imported coal climbing at even greater clips. Peabody's September quarter earnings press release has good data points on the moving parts of the global coal market.
The oversized drop from $70 a share in early 2011 to $20 today presents a terrific long-term buying opportunity in Peabody. The company has a 1.8% dividend return at this price and is trading around its tangible book value. Peabody has remained free cash flow positive in the depressed coal price market of 2012-13. Forward Wall Street guidance puts the current stock quote at 6x annual cash flow and 28x an ultra-low expectation of earnings for 2014.
Largest Coal Company
Peabody Energy (BTU) is the world's largest publicly-traded coal miner. The company owns 28 mines located almost exclusively in the United States and Australia. During 2012, Peabody purchased Macarthur Coal in Australia to become one of the major coal suppliers to fast growing Asia. The company has expanded operations from its original mines in the eastern half of the U.S. to a major Wyoming and Rocky Mountain mine presence, and today a growing reserve and production footprint in Australia's rich coal export market. The company is uniquely diversified geographically, and has the lowest cost structure in the coal mining industry.
Excluding the long-term environmental effects of burning it for electricity generation, coal is still the lowest cost energy resource on many parts of the planet. While regulations in the U.S. and other western economies are discouraging the building of new coal fired electricity capacity, the appetite for quick construction and cheap energy has led to outsized coal demand in China, India and other Southeast Asian economies the past decade. Forecasts call for a strong leap in coal demand far into the future in this region.
While coal prices have weakened the last several years, expanding long-term demand trends will soon take hold again in my estimation and overwhelm the short-term oversupply situation. Specifically, coal demand has been very weak in the U.S. in 2012-13 as electric utilities have used the excuse of abnormally low natural gas prices (vs. the rest of the world) to run gas plants overtime, and idle capacity at their coal plants. Sharply increased domestic production of natural gas in America has led to a supply surplus, with limited options for export to higher priced markets overseas.
UPDATE: Goldman Sachs Upgrades Peabody Energy on Australian Growth, Improving Cash Flow
Dwight Einhorn, Benzinga Staff Writer November 08, 2013 9:22 AM
In a report published Friday, Goldman Sachs analyst Neil Mehta upgraded the rating on Peabody Energy Corporation (NYSE: BTU) from Neutral to Buy, and raised the price target from $21.00 to $26.00.
In the report, Goldman Sachs noted, “We upgrade shares of Peabody Energy (BTU) to Buy from Neutral with 31% total return (including dividends) to our 6-month target price of $26. Four factors underpin our positive view of BTU: (1) the potential for continued cost cutting and volume growth in Australia, (2) the bottoming in met coal prices, (3) improving cash flow and (4) attractive relative and absolute valuation. Even after outperformance in the last three months, BTU has still lagged the S&P500 by over 50% in the last 12 months and 110% in the last 3 years. Our Buy rating comes in the context of a Neutral coverage view of the coal sector.”