The Case Of The Vanishing Money And Attempted Murder Of U.S. Coal

Don’t look now! It’s a frightening scenario for investors with a stake in US coal.

Even as we speak, money is disintegrating. No one seems safe. It’s like a mass murderer is on the loose. Investors in both stocks and bonds of US coal companies are suffering profusely. Someone please! Stop the bleeding!

On Tuesday, Bloomberg reported this horrifying reality: “Two months after Peabody Energy Corp. raised $1 billion from the junk-bond market, buyers have lost 18 percent in market value as a slump in coal prices worsened.”

Bonds! People who bought Peabody’s 10% bonds have lost 18%!

But if you think that’s scary… imagine how the company’s stock investors are faring. Let’s take a loo… Aaaaaaah! It’s worse than I thought!

Investors who bought Peabody Energy (NYSE:BTU) common shares 3 months ago have lost well over 51% of their corpus! Imagine! Those same investors – and it could have been you – were buying shares of a company that traded above $72 per share just 4 years ago, which traded at only $7.84 on February 24th. Now 3 nightmarish months later, the stock closed Thursday at $3.75. It’s as if some kind of harsh chemical is slowly eating away at BTU’s value!

Even worse, many unsuspecting investors stumbled into this sick beast exactly 12 months ago at $18. Those poor souls have an even more gruesome tale to tell, having witnessed over 79% of their investment completely evaporate… as if into thin air!

Murder mystery

Peabody investors seem to be dying a slow death… but is it really a death of natural causes? Or could it be… murder?!

The case truly is mysterious. Allow me to paint the true-to-life picture of a company that seems in many regards to be a pillar of health and strength. Consider, dear reader, these points:

• Who sells more coal than any other company on the planet? Peabody Energy!
• Whose coal fuels about 10% of the electricity generated in the U.S. and 2% worldwide? Peabody again! (source: S&P Capital IQ).
• Who was named 2014 “Energy Company of the Year” at the Global Energy Awards in New York last December? You guessed it! BTU, baby!

Okay, so maybe being named “Energy Company of the Year” in a year like 2014 is a bad omen in some way. But the award is billed as representing “all-around excellence in executing a total energy strategy.” The panel of international judges that bestowed the award credited Peabody with “best-in-class performance, demonstration of a corporate philosophy that is fast-moving, adaptive and forward-thinking and for its perseverance in a time when competitors are faltering and its powerful position as demand for coal continues to grow," according to an article on Peabody’s website.

Peabody’s website goes on to describe a bright outlook for the black, sooty stuff. Here are a few tidbits, copied and pasted directly from PeabodyEnergy.com:

• Coal is the only fuel with the scale to meet the world’s growing energy needs. Coal is the world's fastest-growing major fuel, and is set to surpass oil as the world's largest energy source in coming years.
• Coal fuels about 40 percent of U.S. power, 40 percent of global power, and delivers the lowest cost electricity of any major fuel.
• World coal demand is forecast to increase by some 450 million tonnes in the coming years with 225 gigawatts of new coal generation expected to come on line.
• Since 1970, the amount of U.S. coal used for electricity generation has nearly tripled, while key power plant emissions have decreased nearly 90 percent.

Visitors to Peabody’s home page are greeted with this almost eerily upbeat message (considering BTU’s recent stock performance):

“Peabody Energy (NYSE:BTU) is the world's largest private-sector coal company and a global leader in sustainable mining, energy access and clean coal solutions. The company serves metallurgical and thermal coal customers in more than 25 countries on six continents. Peabody was named Energy Company of the Year at the 2014 Platts Global Energy Awards.”

How could this vibrant company’s stock be dying such a painful death? Could natural causes really explain the whole scenario? Or is foul play involved?

The plot thickens

How’s this for a twist? Even with such an impressive resume, BTU is lagging a coal ETF’s performance by a whopping 60% in the last 12 months. What????!!

That’s right. The Market Vectors Coal ETF (NYSEArca:KOL) is down only about 27% in the last 12 months, while (again) BTU is down 79%! Now are you getting more suspicious?

The verdict

BTU actually isn’t the only US coal company whose stock is being chopped up by a hatchet. Other stocks – like Alpha Natural Resources (NYSE:ANR) and Arch Coal (NYSE:ACI) – have suffered nearly identical bloodbaths over the same period. Earlier this month, Patriot Coal (a 2007 spinoff from Peabody) filed for Chapter 11 bankruptcy protection for the 2nd time in 3 years. Patriot owes about $4.9 million to Peabody, according to the Associated Press.

But what about BTU’s status as the world’s largest coal producer? Shouldn’t that help BTU’s stock? It’s true, people are buying BTU’s coal, but for lower and lower prices. Coal prices have been under severe pressure, in part due to the persistently low prices of a close substitute, natural gas.

Another factor is continually more stringent US government regulations. The Obama administration links coal to climate change, and has thus pursued what the industry calls a “war on coal” for several years. Most recently, BTU shares traded down 11.8% on March 26th (on that one day alone), starting a slide from $6.35 to today’s $3.75 (so far). The news on March 26th was that the US Interior Department unveiled a plan to change the way it collects royalties on coal mined from federal land. In a speech the previous week, Interior Secretary Sally Jewell said, “It’s time for an honest and open conversation about modernizing the federal coal program. How do we manage the program in a way that is consistent with our climate-change objectives?"

But how does any of this jive with the fact the KOL ETF – while still suffering unpleasant losses – is somehow avoiding the severe carnage affecting BTU, ACI, ANR, and others?

Observe: Only about one-third of KOL’s holdings are based in the US. Many of KOL’s Chinese, Australian, Canadian, and Phillipino holdings actually have strong, double-digit positive year-to-date (YTD) returns. Coal is very costly to transport, and therefore is historically produced regionally. Coal is much less of a global market than, say, oil. Coal pricing is much more regionalized, and that dyamic is apparently behind such a wide divergence in coal company stock performance around the world this year.

The prognosis

Is it possible BTU is so saddled by its vast US operations that conditions here in the states could take down the whole company? The market seems to be highly concerned.

Will BTU’s $3.75 stock quickly rebound to $7.50? Or will it even more quickly be cut in half yet again? Time will tell. For now, coal companies’ stocks appear to be in a freakish freefall, with no safety net below.

Another aspect of this whole situation is that BTU has undergone a change in executive leadership in the midst of this turmoil. Perhaps this change, though, could be a neutral or positive event. In its annual shareholders meeting on May 4th, Peabody announced a new & CEO to replace Greg Boyce, who had served since 2006. Boyce remains Executive Chairman of the Board. The new big cheese, Glenn Kellow, came to Peabody as President & COO in September 2013, and joined the company’s board just this January. Peabody referred to the change as a “previously announced succession process.”

New CEO Kellow was quoted as saying he expects global coal demand growth to continue for decades to come. He vowed to lead Peabody to take the necessary steps to succeed in all market conditions. He (of course) acknowledged the very challenging times facing the company in the here and now, but concluded by saying, “I look forward to leading this team as we advance with speed, focus and purpose to create superior long-term shareholder value.” Yahoo! Finance asserted: “Since joining Peabody in 2013, Kellow has led an operational team that has significantly improved safety, productivity and costs, while achieving a host of other corporate accomplishments.” Best wishes, Mr. Kellow, as you and your team pursue further accomplishments, including your goal of creating superior long-term returns.

My bottom line is this: I like green energy like solar, wind, hydro, and geothermal. I wrote about it last week. But I also like coal, oil, natural gas, and nuclear, too. As Greg Guenthner wrote to his paid Rude Awakening subscribers on 7/29/2014: “(Just because I like green energy) doesn't mean I believe we're going to wake up tomorrow morning and stop burning cheap, plentiful coal. It's just not going to happen. I think coal is here to stay in one form or another for decades. The world needs cheap energy, and coal delivers.”

The whole energy sector has been (quite obviously) in the midst of a chainsaw massacre since last summer. Personally, I’m still not prepared to jump into any energy play with both feet. But I’m watching for opportunities, and keeping an open mind to “any and all of the above.”

Best,
Adam Feik
INO.com Contributor - Energies

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.