While America's oil industry in the booming Permian Basin has seen a major transformation over the past years, the same cannot be said for other energy sectors. In particular, coal has fallen out of favor both among consumers as well as investors with coal companies reporting declining revenues across the board. The largest coal company in America, Peabody Energy (OTC:BTUU.Q), said that it was lowering its outlook for Q3 in an announcement that sent shares falling by 10%.
Why did this happen?
Peabody cited three main reasons why sales and earnings would take a hit in the third quarter. The first of which was that it was suffering a "significant delay" in terms of restarting production at its major Australian mine following an accidental death in June. The company estimates that this delay alone would eliminate $35 million of its Q3 earnings.
Other reasons listed included poor prices for coal alongside the fact that many customers are now deferring delivery of coal shipments until later. Peabody added that the total estimated volume for seaborne coal is expected to be at the bottom of its targeted annual range, while metallurgical costs are projected to be on the higher end of its expectations. Overall, third-quarter volumes are expected to dip well below those seen in the previous quarter.
"Peabody now targets fourth quarter 2019 seaborne volumes and costs substantially better than expected third-quarter performance," read an official press release from the company's website.
The previously announced Q2 financial figures for Peabody weren't that impressive either. Revenues came in at $1.15 billion, a 12.2% decline from last year's $1.31 billion, although this was still roughly in line with Wall Street's estimates. The big hit came from earnings, which fell by almost two-thirds from the same time last year, declining to $0.34 per share. In response, the stock tumbled by 11.6% in early August when the results were announced.
What this means going forward
While management tried to downplay the news, it certainly isn't helping the already beleaguered coal giant. Shares of Peabody are down 54.2% so far for 2019 despite the fact that the company has consistently been buying back its stock. Even though Peabody has bought back more than 34 million shares over the past 18 months, Peabody's stock continues to fall.
The coal sector as a whole has been declining as well. The VanEck Vectors Coal ETF, which consists of 26 global coal companies including Peabody, has declined by 25.5% over the past 12-months but only 8.7% so far in 2019. Peabody's underperformance is worrying, especially when an investor stops to ask just how much lower the stock price would have been without these buybacks.
Nor have aggressive dividend payments done much to save the stock. Peabody's dividends have risen by 26% since it relisted in April 2017, with management announcing a massive $1.85 per share supplemental dividend back in February 2019. This was worth roughly 10% of Peabody's stock price and amounted to a cumulative payout of $192 million.
However, neither share buybacks nor large cash dividends have done much to stop this drastic fall in share prices. The problem has less to do with Peabody itself and more to do with the entire coal sector. As renewable energy production continues to ramp up, the seemingly dirty business of coal extraction has left the industry with no way forward in an increasingly green-oriented marketplace.
Strong dividends and frequent stock buyback programs might seem like signs of financial strength, and Peabody might still be the best capitalized pure-play coal stock in America (and possibly the world), but what does that matter if coal as an industry is in a terminal decline globally. It is clear at this point that Peabody has no plans on being anything besides a coal company, and its shares are likely to decline further in the years to come because of that.