Peabody Energy (NYSE: BTU) has reaffirmed its previous guidance of 2014 coal sales volumes. The company still expects to sell 245 million-255 million tons of coal, including U.S. sales of 185 million-190 million tons and Australian sales of 36 million-38 million tons. So far, Peabody Energy has been on pace to reach the higher end of its guidance. The company also reiterated its expectations that U.S. operating costs and expenses per ton will decrease 1%-3% compared to the prior year, while Australian operating costs will average $70 per ton. In the first nine months of this year, U.S. operating costs were down less than 1% compared to the same period of 2013. In my view, one could not count that Peabody Energy would be able to push its costs 2%-3% lower compared to the previous year. Speaking about the company's Australian business, Peabody Energy estimates that costs will be approximately $70 per ton. This estimate is in line with the current performance, as Peabody Energy's Australian costs were $70.36 per ton in the first nine months of this year.
In my previous article on Peabody Energy, I argued that the company's shares had some upside in case of a severe winter and/or met coal rebound in the second half of 2015. As the company's 2014 guidance was not changed, I reiterate my views. It's worth noting that coal companies' shares had some downside recently as almost all energy-related shares were hit by the big slump in oil prices. Although the oil market has its own fundamentals, the big downside in oil is a sign of weaker than expected demand for energy. Thus, shares of companies that produce thermal coal (like Peabody Energy) could experience further downside in case oil dives even lower.
In the longer term, met coal market could be the biggest upside driver for Peabody Energy in my view. However, one has to wait until mid-2015 to see whether previously announced production cutbacks finally translate into higher pricing. Although the biggest chunk of Peabody Energy's revenue comes from thermal coal sales, higher met coal pricing will significantly improve the company's bottom line. Peabody Energy has established itself as a stable producer of thermal coal and met coal with a relatively solid balance sheet. In my view, it will take some time for this strength to be translated into upside for Peabody's shares. In the near future, short-term news will continue to dominate the agenda. I expect that Peabody Energy's shares will continue to trade in a range for several months ahead given the lack of a major upside driver. For those interested in taking a position in Peabody Energy, the low end of the recent trading range looks like a decent entry point.
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