Peabody Energy (NYSE:BTU) is one of the saddest stories in recent SA history. The name was followed, and probably owned, by tens of thousands of SA readers. The company extended its leverage for growth, particularly in Australia. When the downturn for the coal industry came, bankruptcy followed. This is typical of many companies in the energy business.
What followed was not typical. The bankruptcy settlement reserved much of the proceeds to certain of the stakeholders, notable a core group of creditors and Peabody management. Stockholders were wiped out and retail unsecured bondholder`s received much less than they expected. SA contributor Mark Gottlieb has written a series of articles about this. My sense is that many of the stockholders were long time holders and were financially unsophisticated. Really awful, if you think about it.
What I am going to write about is the ownership structure of the new Peabody and what this means for the stock. Before I start, please note that I am not a lawyer, and I have scant experience in reading court documents. So keep that in mind, and please comment if you think I'm wrong.
Let's start out with the share count. It's easy to be confused by the numbers you get on sites like Yahoo Finance. As I read the documents, the new Peabody will have as much as 136.5 million shares eventually. This includes all the stock issued, all the warrants that will be converted into stock (I assume at one warrant per share) and the eventual conversion of the preferred stock (I assume this at 1.9749 shares of common per one share of preferred. However, the actual formula is quite complicated, so this may be off.)
Large owners of any public company must report their ownerships to the SEC. Several forms are used, but the most complete are forms 13-G and 13-D. 13-G is used by owners who plan to be passive stockholders. 13-D is used by owners who plan to participate in company governance. The forms are especially helpful in that they include all types of ownership, including derivatives. In Peabody's case, this includes the warrants.
As of April 3 when the stock resumed trading, five hedge funds or asset managers reported large holdings. This includes warrants and preferred equiv:
|Fund||Form||Num Shrs MM||% of Total|
|Discovery Capital||13-D||28.1||20 %|
|Elliot Intern + Assoc||13-D||27.9||20|
Source: SEC and author's calculations
Presumably, these entities were able to effectively get their shares at a very low price via the bankruptcy court. Note that this group effectively controls the company. This may actually be a good thing. Hedge funds are known for keeping a tight reign on management's empire building plans, so a repeat of the overleverage situation is less likely. It's worth noting that they have assembled a pretty impressive Board, with only one member from management.
What is more interesting to me is the changes since then. Very often when a reorganization is completed, the major holders reduce or exit their positions. After all, the easy money was made in the BK situation. From now on, it's about the company actually making returns over its cost of capital.
Discovery did reduce its position by 6.2MM shares in a block sell. This is only 22% of its position, and they are the only seller. One new fund, Contrarian Capital, filed a 13-G for 14.6 million shares (incl preferred at conversion ratio). Most interestingly, Elliot has aggressively bought shares at market prices. Their position is now up to 35.8MM shares, or 26%. The sellers were likely retail holders who were happy to get out.
The new ownership structure as best as I can calculate is:
|Fund||Form||Num Shares MM||% of Total|
Source: SEC and author's calculations
So what does this mean, and is the stock a buy? Well first, you have be willing to look beyond the shellacking management and the creditors gave the public stockholders. You might say that if they did it once, maybe they will find a way to do it again. OTOH, the company is now subject to normal public company rules, so a retail owner has some protection there. Also, with 79% of the stock controlled by the funds, they have an incentive to make the company work. It's more like private equity than hedge fund.
In any commodity industry, the key intermediate factor is the commodity price cycle. The key long term factor is where the company sits on the commodity cost curve. In the case of coal, the situation is complicated by the secular decline in coal consumption in most of the world. Coal will eventually go the way of firewood, but this may be a long time off.
My sense is that Peabody is a very low cost thermal coal producer in the US and a rather low cost met coal producer in Australia. So the long term looks pretty good. OTOH, the price of Aus. met coal will almost certainly decline from present levels. My view is that US natural gas prices, which put a ceiling on US coal prices, have made a cycle bottom - another positive.
One more issue. I do not want to get into an argument on climate change. Here's my view: In the US, renewables will only slowly take over substantial percentages of baseload power generation. This could happen much faster if efficient ways of storing large quantities of power were developed (Any ideas Elon?). So I generally like the story.
Valuation is hard to compute for such a new company. Accounting treatment of a clean sheet company is different than standard. However, here's the quick and (very) dirty: In the last quarter, BTU earned $.89 per diluted share. Multiplying this by four (very questionable I know) gives a P/E of less than 7. This is a steal if it is close.
I wrote this article because there has been a great amount of commentary on the company on SA, not all of it accurate. I do plan on following the company, although my position will be small until I get a better sense of how operations are going. I also want to make sure that the current owners keep or expand their stakes. This could take a couple of quarters.
Disclosure: I am/we are long A SMALL POSITION IN BTU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please note that this article uses information that was calculated from SEC filings and court documents. I may have misread or overlooked some of this. I am explaining the way I am looking at the company, but this is not investment advice and should not be taken as such.