Coal stocks have been one of the worst performers this year. The sector was pressured by low coal prices and massive debt levels of the companies. The first significant coal stock to report this season was Peabody Energy Corporation (NYSE:BTU). The company has beaten analysts’ estimates, reporting a profit instead of the expected loss. Is this the start of the revival?
Key takeaways from the report
The company has continued to aggressively manage its costs. The costs in U.S. and Australian operations were down 6% sequentially. Capital expenditure targets were reduced $100 million from $450 million to $350 million. Lower Australian dollar exchange rates also benefited Peabody Energy Corporation (NYSE:BTU). Peabody states that it sees more improvement coming on the cost front.
Company’s revenues were down 13% from a year ago, which came as no surprise given current coal prices. Peabody Energy Corporation (NYSE:BTU) has managed to maintain a decent cash position, finishing the quarter with $517.9 million in cash on hand.
The company has commented on its coal outlook. This is interesting not only to Peabody Energy Corporation (NYSE:BTU) shareholders, but for investors in other coal stocks like Arch Coal Inc (NYSE:ACI) and the troubled Walter Energy, Inc. (NYSE:WLT).
India’s coal generation was up 9% through June, leading to a 42% increase in thermal coal imports as domestic production struggles to meet the rising demand for coal. However, as one could see from the railroads’ reports, coal exports from the U.S. continued to struggle.
Japanese demand for coal is improving, as well as Germany’s. The reduction of nuclear power’s share in both nations is the likely reason for that. In addition, Peabody Energy Corporation (NYSE:BTU) states that a lot of production is uneconomical at current prices. The company estimates that 45% of Shanxi producers are unprofitable. Shanxi is a Chinese coal-rich region. The reduction of the coal output would benefit coal prices.
What’s in the future?
Peabody Energy Corporation (NYSE:BTU) has released bullish coal remarks before, but the prices are still low. This brings a lot of worry about the solvency of coal companies. Most coal producers are loaded with debt. The most notorious example is Walter Energy, Inc. (NYSE:WLT), a met coal play, which is down 60% this year. The company raised a lot of debt to acquire additional capacity back in 2011, when the coal prices were at their highs.
Walter Energy, Inc. (NYSE:WLT) has recently provided its preliminary second quarter operating results. The met coal production would be up 7% quarter-to-quarter, while the cash cost of production is expected to decline more than 10%.