How have the mighty fallen: is time running out for Peabody Energy (NYSE:BTU)?
When things start to go wrong for energy companies around climate change, they can unravel very fast, it seems. Peabody Energy (NYSE: BTU) is one of the largest coal producers in the world, and the largest in the United States. In late 2015, the office of U.S. Attorney General Eric Schneiderman found that it misled the public and investors about the financial risks associated with climate change.
Last week Barclays analysts warned that Peabody shares could fall to $1. “With losses mounting, liquidity dwindling, and the company actively seeking to restructure its heavy debt load, we see little intrinsic equity value remaining for the shares,” the analysts’ note said.
Meanwhile federal regulators have said that coal states must decide within days whether Peabody can continue to tap a taxpayer subsidy that has lowered its mine cleanup insurance costs for years, Reuters reported.
“If regulators revoke Peabody Energy's right to the subsidy, known as ‘self bonding,’ the cash-strapped company may need private financing to underwrite roughly $1.38 billion in liabilities that do not now have concrete backing” said Reuters.
According to Bloomberg a few days ago - on Feb. 22 - Peabody might fail to complete the sale of three of its coalmines to Bowie Resource Partners, as the buyer is negotiating the terms of the debt-financing deal with creditors. The coal producer was relying on asset sales to Bowie Resource to improve its cash reserves and reduce its high debt burden.
Alpha Natural Resources (OTCMKTS:ANRZQ) and Arch Coal (OTCMKTS:ACIIQ), Peabody’s peers in coal, have filed for bankruptcy in recent months. While Interior Secretary Sally Jewell has said that shielding taxpayers from roughly $3.6 billion in self-bond liabilities was "a huge priority", regulators have only recently taken concrete action.
Now The Office of Surface Mining Reclamation and Enforcement has called on Colorado, New Mexico, Wyoming, Illinois and Indiana regulators to rule on Peabody's use of the self-bonding program in the next few days - by early March.
In terms of the Barclays Peabody downgrade, some interesting commentary for investors from SeekingAlpha.com: “The stock market can be brutal sometimes, but there is always a place for humor. The Seeking Alpha news team recently reported that Barclays cut its price target for Peabody Energy from $7 to $1. To anyone who has been following Peabody Energy for some time the news is just ridiculous, as the stock went through a 1:15 reverse split and, on a pre-split basis, Barclays downgraded Peabody from 46.7 cents to 6.7 cents.
In the downgrade, the analyst assigned a $18 million value to the company. I can't think of the level of accuracy needed to give such kind of a prediction. However, this is a fact -- sometimes analysts downgrade beaten stocks and assign penny values for companies that fight for survival. In Peabody's case, it is obvious that either the company goes bankrupt and its shares are worth zero or it somehow manages to survive and its shares will shoot up to double digits.”
But it is a company focused on coal production. A note last week from BB&T Capital Markets predicted that Peabody Energy had a far greater than a 50/50 chance of following Arch Coal Inc., Alpha Natural Resources Inc. and Walter Energy Inc. into bankruptcy.
The prediction accompanied the bank’s downgrade of Peabody from “hold” to “underweight.”
“With BTU’s cash burn likely to accelerate in the coming year, its debt-load too burdensome relative to what likely will be at least another year or two of weak coal markets, the asset sale market unappealing for non-tier one/non cash generative assets, and no access to the capital markets, we raise the probability of a bankruptcy filing to far greater than 50/50,” BB&T analyst Mark Levin wrote in a note on Feb.16.
Will March yield greater clarity for companies focusing on coal production in the U.S.? The U.S. Attorney General’s office appears to have only just started to ask awkward questions about the accurate and objective representation of climate change risks and the environmental impact of coal combustion.
“I believe that full and fair disclosures by Peabody and other fossil fuel companies will lead investors to think long and hard about the damage these companies are doing to our planet,” said Attorney General Mr. Schneiderman recently.