Important Clues from Peabody Energy's 10-Q Filing
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Foolish investors are encouraged to look beyond headline earnings and sound bites for important clues about a company's strategy and outlook. For example, Peabody Energy, (NYSE: BTU) provided very useful information in its quarterly 10Q filing released Friday, August 3rd. In the Company's MD&A section is some key commentary which I quote,
"U.S. coal markets experienced downturns in both consumption and production through the first and second quarter of 2012, with declines in U.S. coal-fueled generation driven by mild winter and spring weather, softening economic activity and coal-to-gas switching due to low natural gas prices, partially offset by the benefit of above-average summer temperatures and seasonal stockpile draw downs in June. With several coal miners initiating production cuts and idling operations throughout the the first half of 2012 in order to stabilize near-term supply-demand fundamentals, the U.S. EIA reported total U.S. production decreased from the prior year through June on a quarter-to-date and year-to-date basis by approximately 10% and 6%, respectively. As a result of the contraction in demand, Peabody is targeting 2012 U.S. sales volumes of 185 to 195 million tons, a projected decline of approximately 4% to 9% from 2011 volumes."
My Take: Announced production cuts in the U.S. through June of about 60 million tons is not nearly enough to balance supply and demand for thermal coal. Additional cuts will certainly be coming. These further cuts will weigh on sentiment in the coal sector in the short-term, making a substantial and sustained rally in the coal stocks unlikely over the next several months.
"Global coal markets displayed relative strength during the six months ended June 30, 2012 compared to the softness in US. China's electricity generation rose approximately 6% from January through June 2012 as compared to the same period in 2011. India's coal-fueled electricity generation increased 11% from January through June 2012 compared to the corresponding prior year period. Japan increased its thermal coal imports due to reduced nuclear generation. Steel production in the major Asian economies maintained its trend of year-over-year growth from January through June 2012, though at a more modest rate than those observed during the same period in 2011."
My Take: Despite the doom and gloom regarding China's growth, China's and India's electricity generation was up quite nicely. In China's case, a lot of the increase came from Hydroelectric, but for India it was mostly coal-fired. It's important to recognize that although global thermal coal prices have fallen significantly, production cuts in the U.S. and internationally could reverse the trend at any time and perhaps lead to a rapid rebound in prices. Peabody is signalling that they believe things are improving in the second half of the year. Teck Resources, (NYSE: TCK) also believes that the 2nd half will be better. Teck is the 2nd largest exporter of coking coal in the world.
"On a worldwide basis, steel production for the six months ended June 30, 2012 increased by less than 1% compared to the corresponding prior year period, with the foregoing growth in Asia offset by reduced production from Europe. This flat growth in steel production and an increase in thermal coal exports from the U.S., Indonesia and Colombia during the six months ended June 30, 2012 compared to 2011 put downward pressure on seaborne coal prices, resulting in respective decreases of 36% and 12% in second quarter 2012 benchmark metallurgical and thermal coal prices compared with the year-ago quarter."
My Take: Global steel production through June was essentially flat, hardly a disaster. However, in just the past 2-3 weeks steel prices, demand and production have come down perspicuously. There have been notable reports of Chinese stimulus activities kicking into gear in July to combat slowing growth. This suggests that the decline in coking coal prices could be near an end. Consol Energy, (NYSE: CNX) believes that India could replace any slowing in China. India's coal imports are growing faster than China's albeit from a smaller base.
"Segment Adjusted EBITDA decreased $103.8 million compared to the the prior year during the three months ended June 30, 2012, while slightly increasing $11.5 million over the prior year for the six months then ended. Higher revenues were offset by cost increases resulting from production challenges and costs at our contractor-operated mines, unfavorable geology and product mix.
My Take: One reason why I don't own Peabody stock is that now both 2012 and 2013 are transitional years for the Company. This year is all about integrating the disastrous (my view) MacArthur acquisition and next year will be about transitioning away from contract mining to company operated mines in Australia. Still, Peabody should emerge lean and mean and ready for an eventual resumption of the coal supper-cycle. Peabody's commentary is very helpful in viewing BHP's, (NYSE: BHP) outlook in Australia. BHP is the world's largest coking coal producer. In partnership with a Japanese trading company, BHP is so large that it controls roughly 20% of the seaborne coking coal market.
The above commentary supports the Company's remarks on their conference call that the longer-term thesis of a coal super-cycle remains in place. While visibility over the next few quarters is low, Peabody is a bellwether stock that's down 75% from last year's high. In coming weeks or months we could see a compelling buying opportunity in the shares of Peabody Energy.
MockingJay2011 owns shares of CONSOL Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
