By Rom Badilla, CFA
Due to slower U.S. economic growth coupled with the shift to natural gas, the coal industry has been beaten down recently. While it is unclear if the turn is underway, there are some signs that suggest the coal industry may rebound. Improvement in exports and a slowing shift toward natural gas may fuel the focus back on coal companies. If that is indeed the case, bonds in the sector may perform.
Below are details of a High Yield bond issued by coal industry leader, Peabody Energy Corp. (BTU). As part of Bondsquawk's High Yield Portfolio released last week, this bond offers an investor an opportunity to capture yields along with the potential for price appreciation.
Peabody Energy Corp (CUSIP 704549AK0)
6.0% Fixed Semi-Annual Coupon
November 15, 2018 Maturity Date
Current Market: Offered at $108.38, Yield to Worst of 4.38%
+372 basis points Yield Advantage over comparable maturity U.S. Treasury (On the run 5-Year)
$105.25 Dollar Price, 4.97% Yield to Maturity at time of Inclusion of High Yield Portfolio
'BB+' Rating by Standard & Poor's which falls on the High Yield spectrum
Peabody Energy is the world's largest private sector coal company, with majority interests in 30 coal mining operations in the U.S. and Australia. The coal that is purchased is used in electricity generation and steelmaking. In 2011, BTU produced 227.5 million tons of coal and sold 250.6 million tons of coal, resulting in total revenues close to eight billion. BTU conducts business through its four principal operating segments: Western U.S. Mining, Midwestern U.S. Mining, Australian Mining and Trading and Brokerage. The company has approximately 8,300 employees around the globe and is headquartered in St Louis, Missouri.
Better than expected Third Quarter: BTU reported EBITDA (Earnings Before Interest, Depreciation, and Amortization) of $460 million versus consensus forecasts of $399 million. The surprise was due to robust volumes in Australia better pricing from the Western U.S Mining segment. BTU generated $153 million in free cash flow after $463 million in capital expenditures during the quarter.
Room to Reduce Capital Expenditures: Management commented that it would reduce expected capex in 2013. Meaningful declines in capex would in turn create free cash flow flexibility for the company next year.
Hunkering Down: BTU is doing well to control costs as the company highlighted $100 million of savings from administrative costs and from operations. Furthermore, the company is in the process of cutting 925 jobs as it approaches year-end.
Deleveraging is "number one priority": While total debt has increased from $2,459mm from a year ago to a current $6238mm (Total Debt to EBITDA ratio is at 3.1x from 1.3x) management believes that reducing debt is its "number one priority" going forward. For 2012, the company is headed in the right direction as total debt declined by $300 million. As the company deals with deleveraging, BTU's Interest Coverage is still healthy at 4.8x, down from 8.6 at the same time in 2011.