Peabody Energy: One Step Closer To Bankruptcy

| About: Peabody Energy (BTUUQ)

Summary

Peabody Energy reports fourth-quarter results.

The asset buyer is still arranging financing.

Sales will decline in 2016.

Peabody Energy (NYSE: BTU) has just released its fourth-quarter report. In my view, this was one of the last chances for the troubled coal miner to show why the company won't follow the steps of Walter Energy, Arch Coal and Alpha Natural Resources. Without further ado, let's discuss the key parts of report.

Previously, I was rather skeptical about the possibility to meaningfully decrease costs from the already low levels. The report confirmed my view. In the company's U.S. segment costs decreased from $14.57 per ton in the third quarter to $14.01 per ton in the fourth quarter.

In Australia, costs increased from $48.11 per ton in the third quarter to $48.58 per ton in the fourth quarter. This year, Peabody projects costs of $14.70 - $15.00 per ton in the U.S. segment and $45 - $48 per ton in the Australian segment. Just as expected, Peabody reached the natural bottom for costs and is unable to make more progress in the light of declining sales.

Declining sales is probably the biggest problem (if we forget about the debt load for a minute). Due to challenging market conditions, Peabody lowered its 2016 U.S. sales guidance by 18 million tons - 28 million tons compared to 2015 levels. This is a big blow, as the company's U.S. segment is the one that produces cash flow for Peabody. Given the expected margin, the company will miss $89 million - $139 million of cash flow as a result of declining sales.

As for the Australian segment, any improvement in costs will likely be nullified by weaker seaborne coal pricing. This year started on a very sour note for China, which puts additional pressure on the beaten commodities. Interestingly, Peabody projects just modest seaborne met coal supply reductions in 2016. This is really bad news for everyone who expected better supply rationalization this year.

It looks like the price nightmare will continue for longer than even the pessimist observers expected. The first-quarter benchmark met coal price dropped to $81 per ton, and I wonder where the bottom will finally emerge. Even these prices fail to force radical supply cuts, so the current downside may continue, especially if we continue to get bad news from China on a weekly basis.

The situation is not much better in the U.S., according to Peabody, as natural gas prices put great pressure on the coal's usage in electricity generation. In my view, low natural gas prices have implications beyond the decreased coal consumption by utilities. As long as natural gas stays that low, it will be very difficult for coal companies to arrange financing.

Peabody Energy announced a $358 million asset sale back in November. In the current report, the company stated that the purchaser was currently arranging financing. At first glance, this looks like a risk for Peabody. The company needs money, and if the purchaser won't be able to raise funds in order to acquire the company's assets, this will likely be a death sentence for Peabody's stock.

Peabody assessed the remaining capacity under the revolving credit facility and had $778.5 million of cash on the balance sheet on February 9. One could argue that the company is continuing its fight and that it is bullish for the company's shares. However, it looks like all stars have aligned against the company. Coal markets not only remain weak, but become weaker - and this weakness does not cause radical production cuts.

I've already talked about my theory of a "critical mass of coal miners' bankruptcies" and I have a feeling that this critical mass was already reached. I'm looking at Peabody Energy's quarterly report and I don't understand how the company will be able to compete in this market environment with current capital structure.

In my view, the company's report did not provide upside catalysts for Peabody's shares and the company gets closer to bankruptcy filing as time goes by. This is my first impression from Peabody's earnings release. What is yours?

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