Is It Too Late For Peabody Energy? A Challenge To Its Business Model From E.ON

| About: Peabody Energy (BTU)
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Summary

E.ON, Germany’s largest fossil fuel company, to divest its fossil fuel business.

Peabody’s answer is to expand its coal mining activities.

Peabody Energy’s share price below $10.

E.ON suggests cultural issues make centralized fossil fuel and distributed renewables incompatible within a single business and the future is renewables.

Notwithstanding that Peabody Energy (NYSE:BTU) provided earnings guidance in line with expectations, the stock price for Peabody fell 7.5% overnight to a low of $9.35. So the $10 barrier has been comprehensively broken and one wonders if a price below $9.00 is in sight.

Clearly the overall sentiment continues to be depressed, notwithstanding that some major analysts still have BTU share price guidance close to $20. So what is happening?

The news is bleak for coal (thermal coal in particular) on many fronts, but this week's announcement that major German fossil fuel company E.ON plans to divest its fossil fuel (and nuclear) interests and focus on distributed energy, renewables and customer solutions is a an earthquake in this space. Simply put, the CEO of E.ON Johannes Teyssen has concluded that the culture between a fossil fuel group and a renewables group is too hard to manage within a single organisation. He indicates that the future is with renewables, so E.ON will divest the fossil fuels business. Other major German fossil fuels groups RWE and Vattenfall have different plans, but they involve embracing renewables. Vattenfall plans to exit a big brown coal portfolio to focus on renewables at a time when the German Government is planning the wind down of coal in a similar way to its approach to exit from nuclear power.

The above must be in part a reason for the slide in Peabody's share price, as senior management of Peabody is yet to acknowledge that there is even a problem with remaining totally focused on coal. Peabody is doing everything you might expect a company to do when faced by a temporary severe setback, including rationalizing production (e.g. announcement of a joint venture on a coal facility with Glencore in Australia), but none of this helps if the decline is not a temporary setback, but instead a fundamental shift in the demand for coal.

So what does an investor do? I've indicated previously that without a fundamental reassessment of the overall business, Peabody Energy faces long term decline (which seems to be accelerating currently) and so recovery above $15 seems highly unlikely. However, a share price below $10 is astonishing for the biggest coal company in the world. Perhaps there are some short-term gains to be had if the price recovers in the near term. However, as I indicated in an earlier post, it isn't clear where the bottom lies for BTU now that $10 has been breached. If you wish to have exposure to fossil fuels I'd look at opportunities in oil as more likely to produce interesting short-term gains.

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