Peabody Energy Cuts Capex for 2012
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Peabody Energy (NYSE: BTU) recently announced a $200 million cut in 2012 capital spending from its original budget set earlier in the year as the company reacts to weak conditions in the coal business. Despite this reduction in spending, the company remains optimistic on the long term viability and strength of the coal market in the United States and abroad.
Peabody Energy is the largest coal producer in the United States, with 2011 production of 204 million tons. The company has operations in several major basins including the Powder River and Illinois Basins. Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) are a distant second and third in U.S. production in 2011, at 157 million and 106 million tons, respectively.
2012 Capital Spending
Peabody Energy plans to spend between $1 billion and $1.2 billion in capital in 2012, a $200 million reduction compared to the original capital plan established in January 2012. The new budget will require the company to delay several projects and reflects the current weak fundamentals for the United States coal market. The lower spending by Peabody Energy also incorporates possible threats to world economic growth from the sovereign debt crisis in Europe and a slowdown in China.
The coal sector has seen its share of carnage recently with Patriot Coal filing for bankruptcy several weeks ago and other operators getting close to the brink of a similar filing, with James River Coal rumored to be the most likely candidate.
Peabody Energy, Arch Coal, Alpha Natural Resources, Walter Energy and CONSOL Energy are all trading at multi year lows as investors discount a continuation of weak fundamentals in the sector.
Peabody Energy is still bullish on coal in the long term and expects that global demand for coal will increase by 1.3 billion tons from 2011 to 2016, and reach 8.9 billion tons by 2016. This increase in demand will be generated from the continued economic growth out of the emerging economies of India and China.
Peabody Energy estimates that India and China will add approximately 310 gigawatts (GW) of coal fired power generation plants over the next five years. Another 75 GW of coal fired power generation will come from other emerging countries by 2016.
Peabody Energy estimates that coal demand in the United States will drop by 100 million to 120 million tons in 2012, as coal is displaced by lower cost natural gas. Coal inventories reached record levels in the United States and the large supply along with lower demand has kept prices down.
Peabody Energy finds some comfort with the recent increase in natural gas prices, which has made burning coal more economic than natural gas in some areas of the United States. The company also believes that most of the anticipated retirements of domestic coal fired power generation plants will be offset by new facilities and higher utilization of existing plants.
Peabody Energy is cognizant of the weak domestic coal market and potential threats to global economic growth and is adjusting its 2012 business plan to reflect these conditions. Whether this will be enough to correct the balance between supply and demand is what investors must decide before putting money to work in the coal sector.
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