Peabody Energy (NYSE:BTU) released its quarterly results on April, 18. Coal companies are under enormous pressure this year. Peabody's results are interesting not only to current shareholders or prospective investors, but for all with interest in coal companies.
Peabody was the first coal company to release its results. Quarterly results were positive from the fundamental side. Also, these results were positively met by the market, and we all know these two things don't always come together. The stock rose more than 7% on the day of the release. It is still down 23% year-to-date.
BTU finished its first quarter with a loss of $0.05 per share (company data sourced from its earnings news release) . This is a good result given current situation with metallurgical and thermal coal prices. I would like to focus on things that, in my opinion, bring hope to the stock performance prospects.
The company is focused on costs. For example, BTU states that its Australian costs declined 10% on improved productivity from PCI mines and cost reduction initiatives. This is the thing that you would like to see in the current environment. No one has a crystal ball and can be sure that metallurgical and thermal coal prices would be rising. Passive wait for better future could be suicidal.
BTU stated that it saw positive development in both thermal and metallurgical coal segments. Natural gas prices are rising. They have successfully passed $4.00 and are rapidly approaching $4.50. In its earnings call, BTU states that inventory levels hold thermal coal prices from rising. However, as natural gas prices continue their way up, there would be more incentives for utility companies to switch to coal. At some point, this would contribute to coal prices. India's thermal coal imports rose 25% in the first quarter. This is a good sign from a big market.
In the metallurgical coal segment, all eyes are on China. In its earnings news release, Peabody states that China's coal imports increased 30% through March, and full-year imports are expected to rise more than 10 percent in 2013. In its earnings coal, BTU says that 15-20 mln people move to cities in China every year. Urbanization drives demand for steel, and, therefore, for metallurgical coal.
BTU is dealing with its debt. It has repaid $100 mln in debt and is planning to repay another $100 mln of debt by May of 2013. The total amount of debt is still big. After $100 mln would be repaid in May, there would still be $6 bln more to deal with.
There are limits to cost cutting. You cannot do this forever. At some point, coal prices would have to rise for the company to deliver good results. One should recognize that it's not only the demand that drives the prices. Supply plays its role, too. Rising prices could push producers to increase production. If this happened, it would be negative for coal prices.
All in all, I view BTU's results as positive. They give a hope not only to shareholders of Peabody, but also for those of Arch Coal (NYSE:ACI), Alpha Natural Resources (NYSE:ANR) and the hard-beaten Walter Energy (NYSE:WLT). These stocks rose on average 6% after Peabody's earnings report.
An investor who is considering a position in coal could think about buying BTU in the $19-$21 range. I don't think that it would be a fast trade. There are too many hurdles on the road. I would not recommend buying BTU to investors with short-term goals.