Coal's ‘Last Man Standing’ Dragged to the Brink of Bankruptcyby
Peabody's bankruptcy would mark the end of an era: analyst
Biggest U.S. coal miner has lost 98 percent of market value
Welcome to the twilight of American coal.
Peabody Energy Corp., the nation’s biggest miner, is on the verge of bankruptcy, crippled by $6.3 billion in debt. The company’s announcement Wednesday that it may file sent a decisive signal to the market: The U.S. coal industry is still too big.
“It’s the end of the era of publicly traded coal companies,” said Ted O’Brien, chief executive officer of Doyle Trading Consultants, an energy markets research group.
Peabody has lost 98 percent of its market value in 12 months and watched as its main rivals -- Walter Energy Inc., Alpha Natural Resources Inc. and Arch Coal Inc. -- all filed for bankruptcy, crushed by falling demand, massive debt loads, mounting environmental regulations and competition from cheap natural gas. Coal prices have plummeted as much as 75 percent since 2011, and hundreds of mines across the country have been shuttered. The combined market capitalization of U.S. coal miners since 2011 has plunged from over $70 billion to barely $6 billion, according to data compiled by Bloomberg.
Many analysts reckoned Peabody would be the one to survive the downturn. As the biggest producer of them all, it has a diverse mix of operations from Illinois to Australia -- including one giant open pit in Wyoming that churned out about one of every eight tons of coal mined in the U.S. last year. But for all its reach, the 133-year-old company hasn’t posted an annual profit since 2011 and is now buckling under its debt.
By Tuesday afternoon, callers to Peabody’s investor relations office heard this recorded message: “Given ongoing activities regarding our financial objectives, Peabody is not accepting calls at this time.” In a regulatory filing Wednesday, the company said its ability to operate as a “going concern” is in doubt. For months, Peabody has tried to find rescue in the financial and capital markets. Its inability to do so underscores Wall Street’s vanishing interest in saving the lives of coal companies.
“For the last 10 years, Peabody’s been thought of as the bellwether of the U.S. coal space,” said Jeremy Sussman, an analyst at Clarksons Platou Securities Inc. “Any time you’re thought of as the industry leader, there’s a natural tendency to think you’re going to be the last man standing.”
It’s a remarkable turnaround for a company that portrayed its future as rosy as recently as 2014. That December, in fact, then-CEO Greg Boyce accepted CEO of the Year honors at the Platts Global Energy Awards and Peabody was named Energy Company of the Year for demonstrating, among other things, exemplary performance.
By last May, Glenn Kellow had replaced Boyce at the world’s largest private-sector coal miner, and the storm clouds had arrived. Peabody announced a series of layoffs, closed offices, and put mines up for sale. It was said to hire Lazard Ltd. to advise on restructuring its debt.
Debt has been an industrywide burden. The miners all made the same big stumble in 2011, when the price of the metallurgical coal used in steelmaking went as high as $330 per metric ton. Looking to capitalize on booming demand out of China and elsewhere, the companies loaded up on debt to make massive acquisitions. Peabody spent $4 billion to acquire Australia’s MacArthur Coal Ltd. Since then, the price of metallurgical coal has plunged 75 percent to its lowest in more than a decade.
“The industry was very exposed and their capital structures became unmanageable,” O’Brien said.
Peabody skipped $71 million in semi-annual coupons that were due Tuesday. It has a 30-day grace period to make the payments as bondholders grow increasingly impatient. One of its creditors, money manager Franklin Resources Inc., has pressed the company to restructure its debt in court, people with knowledge of the matter told Bloomberg this month.
In the past two years, at least six U.S. coal-mining companies have filed for bankruptcy, restructuring a total of $23 billion. With a boost from fracking, the U.S. produced more natural gas in 2015 than it ever has, while U.S. coal production fell last year to its lowest level in decades and is projected to decline even more this year.
It could get worse: The U.S. Environmental Protection Agency issued a regulation in 2015 that requires states to make cuts to greenhouse-gas pollution caused by power plants. The rule, put on hold by the Supreme Court, would result in the closing of hundreds of coal-fired plants and force more switches to natural gas.
Already, natural gas has eclipsed coal to become the primary source of U.S. electricity generation, according to the Energy Information Administration. Coal now accounts for 28 percent of the power mix, down from more than half just nine years ago.
Electricity was novel when Francis S. Peabody founded his company in 1883 with $100, a wagon and two mules. Today Peabody has customers in 25 countries. At its height in 2013, it had 8,300 employees and sold 252 million tons of coal. In 2015, its payroll was 7,600 and sales had slipped to 229 million tons. It recently forecast 2016 sales will go as low as 195 million tons.
In May 2014, a year before Kellow became Peabody’s CEO, he gave the commencement address to the South Dakota School of Mines and Technology. In his Australian twang, he recounted a career in mining that had taken him from Mongolia to Colombia to New Mexico. And in words that would foreshadow his tenure at Peabody, he advised the graduates to prepare for the unexpected.
“General Colin Powell was quoted as saying, ‘No battle plan survives five minutes of contact with the enemy,’’’ Kellow said. “Perhaps a quote from Mike Tyson is more apt. The boxer once said, ‘Everybody’s got a plan until you get punched in the mouth.’’’