Shares of Cloud Peak Energy (NYSE:CLD), a pure-play coal company located in the Powder River Basin, plunged as much as 11% during Thursday's trading session after the company announced that it had priced a public offering of its common stock.
After the closing bell on Wednesday, Cloud Peak Energy announced a public offering of 13.5 million shares of its common stock at $5.10 per share. Considering that Cloud Peak closed on Wednesday at $5.68, today's drop almost perfectly mirrors the reduced price with which its new shares are to be sold. As per the norm, the underwriters of the deal can also purchase up to 2 million additional shares.
According to the press release from the company, the gross proceeds, expected to total $68.85 million before applicable taxes and fees, will be used to redeem an outstanding 8.5% senior note due in 2019, along with accrued and unpaid interest to the redemption date. Any unused funds are expected to be used for general corporate purposes. Cloud Peak Energy's fourth-quarter report listed $62 million in outstanding debt due in 2019, with another $290 million coming due in 2021.
While there is at least a very good reason for Cloud Peak Energy's common stock offering, it doesn't alter the fact that issuing more shares dilutes the value of existing shares held by investors.
Considering that Cloud Peak Energy's share price was on the verge of breaking below $1 in Jan. 2016, the company's ability to raise enough capital to retire its 2019 senior note with only 10% to 11% in share-price collateral damage is pretty impressive. It may not be what shareholders would like to see, but given the current conditions in the coal industry, it's the best move for the company to ensure it pushes its debt obligations further out.
The big question moving forward is whether or not President Donald Trump can truly revitalize the coal industry. Removing some of the most stringent regulations would be a great start, but coal companies would still need wholesale pricing to cooperate, and electric utilities would need to slow their adoption of cleaner-burning fuels. There's just no guarantee any of those things will happen.
The solace, if there is one, is that Cloud Peak Energy has done a remarkably good job of minimizing its wholesale exposure and locking in fixed-price contracts. Some 53 million of its 54 million tons of committed production this year are under fixed-price contracts, with about half that amount (25 million) set for fixed-price contracts in 2018. This should allow Wall Street and investors to get some idea of what type of cash flow and profitability to expect, at least in the near term.
While the industry is looking better with Trump in the Oval Office, you'd probably be wise to stick to the sidelines and wait for further evidence of a turnaround before dipping your toes in the water with Cloud Peak Energy.