On Aug 18, we issued an updated research report on coal mining company Peabody Energy Inc. (BTU). Peabody’s presence in two of the fastest growing U.S. coal markets and its exposure in Australia could help it to overcome the current slackness in the coal market. However, the U.S. Environmental Protection Agency’s (:EPA) proposal to curb pollution could negatively affect coal demand and consequently impact the future prospects of the miners.
Peabody Energy, a Zacks Rank #3 (Hold) stock, reported a loss of 28 cents in the second-quarter 2014, marginally wider than the Zacks Consensus Estimate of a loss of 27 cents. However, overall improvement in sales volumes and higher realized prices of U.S. tons sold helped the company to beat the top-line estimate.
Peabody expects a revival in thermal coal demand globally, led by continuous urbanization and industrialization in the Asian countries, primarily in China and India. A World Steel Association projection indicates an improvement in met coal sales driven by higher steel consumption. Harsh winter conditions in the U.S. had led to higher usage of coal-fired units to meet increasing demand for electricity, thereby lowering stockpiles. This could also create fresh demand for thermal coal.
However, these positives are negated by the ongoing congestion in railroads services in the U.S. Peabody lowered its 2014 U.S. coal sales target to 185–190 million tons from 185–195 million tons to accommodate the loss in sales due to railroad congestion. Increasing pressure from natural gas and alternate energy sources continue to weigh on the coal stocks as well.
In June this year, the EPA proposed a Clean Power Plan, the primary objective of which is to cut down emissions from existing coal-fired power plants by 30% over the 2005 to 2030 time frame. If the proposal is accepted, it could hurt Peabody s domestic thermal coal sales as coal-fired power units are a major contributor of greenhouse gas generation.
Coal still grabs a major share in the global energy mix, despite increasing pressure from other fuel sources. Peabody’s strategic presence in the U.S. and Australia could help it to benefit from any revival in the coal markets.
However, Peabody will have to ward off competition from other coal producers like Alliance Resource Partners (ARLP), Alpha Natural Resources, Inc. (ANR) and Arch Coal, Inc. (ACI).