Do you remember, back in 2006, when President Bush said that the U.S. was on the verge of breakthroughs in energy technology that would "startle" most Americans?
Peabody Energy (NYSE: BTU ) certainly doesn't bear the mark of a company that is bracing for an imminent fuel switch that might render coal obsolete. The company continues to fast-track expanded export capacity for both thermal and metallurgical coals from Australia destined for seaborne trade, primarily to India and China. The consensus forecasts for rapidly increasing demand for coal, and the accompanying upward pricing trend, stand in full support of Peabody's aggressive growth initiatives.
For the first quarter of 2010, Peabody enjoyed a boisterous 44% increase in net income over the fourth quarter of 2009. Compared to a rather remarkable prior-year quarter, however, profit remained unchanged at $0.50 per share. Although Peabody's coal trading unit chipped in only about half of its prior-year contribution to EBITDA, because of reduced volatility and "structured transactions" (think derivatives), the unit earned bragging rights over the loss incurred by its counterpart unit at rival Arch Coal (NYSE: ACI ) .
Pending price pandemonium
If you think the management of Peabody Energy has any doubt about the direction in which coal prices are heading from here, think again. The miner has left as much as 5 million tons of metallurgical coal production -- or about half of its full-year production target -- unpriced for the remainder of 2010. Even with met coal spot prices reaching $250 per ton -- $50 more than the April 1 quarterly benchmark price -- Peabody has left virtually all of its 2011 met coal production similarly exposed.
At least 45% of Peabody's thermal coal production in Australia remains unpriced, with a further 9 million to 10 million tons unpriced for 2011. Peering further afield, into 2012, we find Peabody's confidence in these long-term pricing trends extending to the recovering U.S. coal market: "Peabody retains the largest unpriced position in the industry for 2012 with 120 to 130 million tons available for pricing in the United States, along with 23 to 25 million tons in Australia," the company said.
The evidence supporting Peabody's confident expectation of higher thermal and met coal prices has been duly corroborated by insightful industry titans like Joy Global (Nasdaq: JOYG ) , this landmark $60 billion thermal coal supply deal with a Chinese utility, the massive build-out of Australian coal export facilities like Peabody's joint venture in Newcastle with BHP Billiton (NYSE: BHP ) and Yanzhou Coal Mining (NYSE: YZC ) , Peabody's persistent efforts to acquire Macarthur Coal, and the long-term forecasts of the U.S. Energy Information Administration.
I'll say it again: If you have zero exposure to coal, you could be missing out on one of the clearest growth opportunities of the decade. I can discern only one primary risk factor to this long-term outlook, but any sidelined energy investors who have been holding their breath for a world-changing breakthrough since 2006 will tell you it's best to come up for air ... even if it's dirty air.