Peabody Energy (NYSE:BTU) is the largest and most diversified publicly traded pure-play coal miner. Its first quarter loss of nearly $0.20 a share doesn't inspire confidence in the broader coal market's future. But the company's global footprint does provide a glimpse of what's going on throughout the industry.
Met coal's stranglehold
A year ago, Peabody lost $0.09 a share in the first quarter. Management had been calling for earnings to fall between $0.14 a share and a loss of a dime. They obviously missed their estimate, though some of that was from one-time items. The biggest detractor, however, was continued supply-driven pricing pressures in metallurgical coal.
Peabody only mines met coal in Australia, where coal revenues fell around 17% in 2013 despite selling nearly 6% more tons of coal from the region. The big problem was an over 20% drop in revenues per ton, largely driven by the oversupply of met coal. The company's Aussie business hasn't improved, with revenues per ton down about 17% year over year in the just-ended quarter.
That pairs nicely with what's going on at domestic player Natural Resource Partners (NYSE:NRP), which cut its dividend by 36% in early January because of continued weakness in the coal market. However, in an April presentation it gave an update on the market that helps to clarify where the problem lies. The thermal outlook was generally positive, but the first two bullet points on the met side were, "Prices at lowest level in several years" and, "Market is currently being overproduced." So the outlook for Peabody's Aussie operations through the rest of the year isn't great.
It's no wonder that Natural Resource Partners has been buying into non-coal assets in recent years. Those businesses accounted for around 30% of the top line in 2013, up from about 5% in 2005. And that number should get even larger this year as recent investments in natural gas assets should lead to a doubling of revenues from the relatively new gas segment.
The diversification effort should lead to a relatively solid first quarter for Natural Resource Partners -- especially since the company's outlook for thermal coal is actually pretty constructive. For example, management highlighted the cold winter, low utility inventories, an increase in natural gas prices, and foreign demand as positives. This suggests that the domestic thermal downturn might actually be nearing an end.
In fact, during Peabody Energy's fourth quarter conference call, CEO Gregory Boyce noted, "PRB prices were up nearly 40% from their lows of last year." Based on Natural Resource Partners' April update on the thermal market, it's no surprise that U.S. thermal coal was actually a positive for Peabody, with a 10% jump in PRB shipments offsetting an overall 7% price decline in its U.S. business (the company also mines in the Illinois Basin).
The PRB accounted for almost 40% of revenues in 2013. Moreover, Peabody produced over 4.5 times as much coal from its PRB business as it did from its Australian met mines, its second largest operating segment. So, even a small price increase in the PRB will do a lot of good through the rest of the year. Keep an eye on this region and its impact on Peabody's business.
That's less true for Natural Resource Partners, which has relatively little exposure to the PRB. In fact, met coal is the partnership's largest revenue source at around 25% of the top line -- thus the dividend cut despite continuing diversification efforts and the signs of a nascent turnaround in the U.S. thermal coal market.
Listen to the words
At the end of the day, Peabody's update on the coal market is probably more important than its weak earnings result. The big news is that the PRB appears to be signaling a U.S. thermal coal rebound. That would be good for all of the domestic miners, particularly if it starts to spread to the other major coal basins. The other big news is that metallurgical coal is still struggling. That, unfortunately, means continued headwinds for Peabody and Natural Resource Partners.