It's been a rough few years for pretty much every business in the energy sector, but the recent oil bust pales in comparison with coal's nosedive. Last week, America's largest coal company, Peabody Energy, filed for Chapter 11 bankruptcy protection.
In this segment from the MarketFoolery podcast, Chris Hill talks to Bill Mann and Bill Barker about the knock-on effects of the commodity's decline, just how bad Peabody's financials have been in the past few years, and where the coal industry might go from here.
A full transcript follows the video.
This podcast was recorded on April 13, 2016.
Chris Hill: We have to start with coal. Coal is --
Bill Mann: The senator?
Hill: Not the senator from Wisconsin.
Mann: Oh, the burning rock!
Hill: The burning rock. Today in coal is pretty significant because Peabody Energy is the largest coal company in America, and it has filed for bankruptcy. And first-quarter revenue for CSX (NASDAQ:CSX), the railroad operator, came in lower than expected because coal shipments fell 31% year over year. I'm sensing a theme. I mean, if you're an oil company or someone who invests in oil, is that the solace you take? "Well, at least we're not coal."
Bill Barker: So this was not a hard one to see coming. I say that because Peabody lost $110 a share last year.
Mann: And they don't have, like, six shares. They have way more.
Barker: Well, they had a 15-to-1 reverse split recently, so the shares had gone down. But losing $110 a share when you're a $2 stock is a bad math equation. And the equation was basically they sold about $5 billion worth of coal last year, and they lost $2 billion in the process, which is not something you can keep up.
Mann: Some of that's writedowns, though. That's not all cash. But it is enough ...
Barker: It's a grim equation, and has been for a while for coal, and I don't see it getting better anytime soon. But if you're in bankruptcy, at least you can straighten out some of your debts by not paying them.
Mann: Yeah, for sure. The thing that I cannot figure out, the thing that doesn't make sense to me, which means I'm probably not thinking about it right, which my wife tells me happens all the time, is coal is basically being replaced by other fuels. Utility slates have changed. Natural gas is the natural, the easiest place to go. Natural gas prices are nearly as far down in the dumps as met coal prices. And it is simply something that doesn't make sense to me, how that would be the case.
Hill: Why are shares of CSX up around 5% today? I get that, from the standpoint of their quarterly profits, they did just fine, they did about as expected. But clearly, the transport of coal is a significant part of their business. That is very much on the decline. Where is the enthusiasm coming from for this business?
Barker: Moving coal is a huge part of the rail business, especially for CSX and some other companies. But coal is down 31% year over year in volume.
Mann: From a not-very-high number to start with.
Barker: Yeah, already declining. And I think that CSX, it's certainly not that number, or, that number was expected. Coal is not reversing, but the monthly numbers were better than expected, I think. Genesee & Wyoming had its monthly numbers out; it's up more than CSX today. So I think, on the whole, rail transport is beginning to show a little bit of life coming back. The stocks have all gotten clobbered, as most things in the transportation sector have. But everything's come back a little bit, and on the whole, although the quarter just past doesn't look all that good, there are things since the end of the quarter that look better.
Mann: So at Fool Funds, we don't spend a whole lot of time thinking about daily movements. But Bill, try this on for size -- the fact that Peabody has gone into reorganization rather than liquidation perhaps suggests that they may have some additional financial flexibility going forward? Because although I would not call coal a growth industry, there's going to be many, many years in which coal is being moved in rail cars around this country. It is simply the case that it's a big part of the slate for utilities. So I kind of wonder if some of it has to do with the fact that Peabody is finally attempting to get its financial house in order in a greatly reduced state.
Barker: I think that the rails are a diversified industry moving a lot of things other than coal --
Mann: First-rate fresh-squeezed orange juice, for example?
Barker: Yeah, sure. Actually, when we go outside here, we're right by a major rail line, and boy, we see a lot of frozen concentrated orange juice cars go by us, which sort of detracts from the atmosphere of a nice spring day, you know? [laughs]
Hill: [laughs] A massive rail car coming by?
Barker: So I don't know of anything else, any industry that is more squarely going to be affected by the outcome of this election than coal, and I've said that before, maybe here. But you've got very different philosophies between the Democrats and Republicans on coal. Just, the question, coal. One word, good or bad? There is a 100% chance that you can predict, coal, good or bad? You're only allowed to say one of those two words. Democrats will say bad; Republicans will say good. Now, they don't ever answer anything in one word ...
Mann: Neither do you.
Barker: "Unfortunately, coal is going away, blah blah blah, but we're going to help, blah blah ... " But, really, this is an industry which is paying a lot of attention to the election.