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Falling coal prices have hit coal miners with a lot of debt on their balance sheets. Peabody Energy (NYSE: BTU ) is not an exception. The company has $6 billion in long-term debt. As coal prices do not show signs of a serious rebound, refinancing the debt becomes a tempting target. Peabody is rumored to be seeking refinancing of its $1.2 billion term loan.
At the beginning of this summer, another coal miner, Walter Energy, announced that it was trying to refinance $1.55 billion of its debt. The company gave up these efforts just a week after the announcement. Will Peabody share the same fate?
Peabody recently reaffirmed its full year 2013 guidance. The company expects to sell 230 million–250 million tons of coal. If Peabody could make it to the high end of the guidance, it would replicate the previous years' results. It sold 248.5 million tons of coal in 2012 and 249.4 million tons of coal in 2011.
It would not be the easiest thing to do. Coal's share in energy consumption has fallen from 18.3% in 2012 to 17.5% in the first five months of 2013. Natural gas prices remain low, providing an attractive alternative to coal.
Other suppliers of steam coal were not as reassuring as Peabody. Arch Coal (NASDAQOTH: ACIIQ ) guided that it would sell 130 million – 137 million tons of steam coal in 2013, down from 140.8 million tons in 2012. Alpha Natural Resources (NASDAQOTH: ANRZQ ) lowered its guidance in the second quarter report and now expects to ship 64 million – 70 million tons of steam coal this year, down from 88.5 million in the previous year.
Interest payments put a serious burden on coal miners' earnings. Peabody had to pay $110.8 million in interest in the second quarter of this year. The company had just $26.4 million of operating profit, and only $184.7 million of income tax benefit helped Peabody finish the quarter with a profit.
Peabody expects to finish the year with earnings of -$0.16-$0.09 per share. Analysts are more optimistic, predicting earnings of $0.14 per share. So far, the company has earned $0.24 per share. It means that both the company and analysts are expecting that Peabody will finish the second half of this year with a loss. It also means that they do not expect coal prices to rebound soon.
Recent news from China will not help coal prices. Beijing plans to cut annual coal consumption by 13 million tons. At the same time, BHP Billiton has just opened the Daunia mine in Australia, which is expected to produce 4.5 million tons per annum. These developments highlight the problem of excess supply that plagues coal prices. The demand is restrained by environmental and economic worries, while more coal continues to enter the market.
It's important to notice that all those miners have relatively easy debt schedules. The first major payment for Alpha Natural Resources comes in 2015, when it will have to pay $823 million. Arch Coal and Peabody have time until 2016, when they would have to pay $600 million and $650 million respectively. However, time is running out fast for these miners, and we will probably see more refinancing attempts to improve the debt schedule.
Among these miners, Peabody is the only company that can finish the year profitably. It gives it the edge in the debt market. As Peabody has shown its ability to operate more or less profitably in the current environment, I think that its refinancing effort would be successful. This will enhance the company's financial position and provide support for the stock.
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