It's like a scene out of a Monty Python movie. The coal industry is wheeling a cart around, calling on investors to bring out their dead. Though Peabody Energy (NYSE: BTU) has been tossed on the heap after losing 90% of its value during the past year, its recent second-quarter earnings report is the equivalent to its calling out, "I'm not dead yet!"
But it is, and just doesn't know it. Despite reporting massive losses and revenues that are withering away, an optimistic forecast for the next couple of years heartened investors and analysts alike, spurring a near 20% rebound in its stock. Unfortunately, it's too little too late, and it only becomes a matter of time before Peabody's casket is lowered into the ground.
The last nail in its coffin might have been last month's Energy Information Administration report showing for the first time ever, that electricity generated in the U.S. from natural gas surpassed that generated from coal.
Down and dirty on coal's fall from grace
In April, coal generated more than 88.8 million megawatt hours of electricity, an 18% decline from the month before, and responsible for 30.2% of the total. Natural gas, on the other hand, dropped just 6%, to 92.5 million megawatt hours of electricity generated, or 31.5% of the total.
While it was somewhat indicative of the typical falloff in demand for both forms of energy for seasonal reasons -- and the latest report shows coal has gained supremacy once again -- the fact that natural gas usage has grown so pervasive as to be able to surpass coal, even if just for one month, shows the writing is on the wall for Peabody Energy. It's time to summon the preacher to administer last rites.
When you're in a hole, stop digging
Peabody reported revenues tumbled 24% to $1.4 billion in the second quarter, causing it to lose more than $1 billion, or $3.71 per share. If you account for one-time items, the loss registered at $0.65 per share, but still worse than the $0.61 Wall Street had predicted.
Investors, though, bid up Peabody's stock -- and continue to do so -- as it offered hope for the future. Not only was it suspending its dividend payment to conserve cash, but analysts say that, by 2017, its hedges will be eliminated, and the amount it needs to pay into reserves and health benefits will stop, meaning it ought to become free cash flow positive again.
That sounds too much like wishful thinking. It was not long ago, after all, that despite a dour industry outlook, Peabody was saying everyone had it all wrong, and coal was on the cusp of a huge "supercycle" that would drive demand higher. Instead, all it found was intense regulatory scrutiny, plummeting prices, and slack demand for metallurgical coal. Not even China could lift it out of the doldrums.
Peabody and the rest of the industry were only carried along because demand for natural gas was weak, too. Back in 2010, when Peabody was saying to hang on for the ride, coal represented 45% of all electricity generated, and natural gas was 25%. Even with coal on top in June, 32.6% to 31.4%, whatever advantages coal had have all but evaporated.
Behind the eight ball
Coal's undoing was not necessarily a fault of its own, or of Peabody's, but rather a confluence of pressure helped along by an administration's animus toward the industry.
President Obama, who once campaigned on the promise of bankrupting coal-fired power plants with onerous regulation and costs, has seen during his presidency a whole host of coal-related companies go under, including Americas Energy, America West Resources, Clearwater Resources, Consolidated Energy, Dynegy, Edison Mission Energy, James River, Longview Power, and Patriot Coal. All have sought out the protective cloak of the bankruptcy courts.
Obama, of course, wasn't the only force against the industry. New technologies, like horizontal drilling and hydraulic fracturing, allowed drillers to reach previously inaccessible reserves in shale rock deposits, sparking the current natural gas boom. Now, the persistent value found in low-cost gas has driven usage to the point where it can effectively compete against coal for dominance. It's only a matter of when, not if, the EIA is regularly reporting natural gas out-generates coal in electricity.
Let's not forget Illinois Basin coal producers either. While much of the industry is on the rocks -- Alpha Natural Resources is the most recent victim to go bankrupt -- producers like Alliance Resource Partners (NASDAQ: ARLP) and Foresight Energy (NYSE: FELP) appear to be thriving.
While falling coal demand and increasingly onerous environmental regulation make their future a more risky proposition (not to mention the potential for resource depletion limiting future output), they've been able to hold major producers like Peabody at bay by churning out record amounts of coal, blocking its ability to bolster prices or production. They're profitable now, but with Foresight for example sporting a dividend yield north of 17% (Alliance is above 11%), they may find themselves similarly constrained in the future.
The dead shall rise
This is why investors ought to be leery of the dead-cat bounce that Peabody Energy's stock took. We've seen these words of hope expressed before, and none have come to fruition. Even with the respite recently granted to the industry by the Supreme Court in saying that the EPA overreached its regulatory authority, there's little expectation the country will go back in time and start building more coal-fired plants.
For good more ill, Peabody Energy and the coal industry are already dead. They just don't know it yet.