Premier coal operator Peabody Energy Corporation (BTU) has extended and expanded its existing credit facility. The new credit facility comprises a $1.65 billion revolver due in 2018 and a seven-year $1.2 billion term loan due in 2020. These replace a $1.5 billion revolver due in 2015 and a $1.2 billion term loan due in 2016.
Peabody has thus made good use of the favorable market conditions to extend its credit facility. The extension of the maturity period will allow the company to use the capital more prudently once the coal market recovers from its present slump. Incidentally, the current softness in coal demand has prompted Peabody to lower its capital expenditure guidance by 20% from the year-ago level to a band of $350 million to $450 million.
Peabody is one of the leading coal operators having a strong presence in Australia and the U.S. As per a study conducted by the company, annual global coal demand is expected to increase by 1.2 billion tonnes between 2012 and 2017. This is primarily due to the additions of nearly 425 gigawatts (GW) of new coal-fired units over the said period. It is quite evident that the current coal production level has to increase to meet the target.
Peabody’s move to expand its credit facility is perfectly timed and will provide the company ample liquidity to expand its existing operations as and when required. A $150 million increase in Peabody’s credit facility will help it to develop its existing facilities and fund future acquisitions.
The domestic coal business is expected to turn more competitive due to strong competition from natural gas and renewable sources. Moreover, President Obama’s Climate Action Plan and the U.S. Environmental Protection Agency’s (EPA) announcement to lower carbon emission from newer coal-based power plants could increase the cost of power generation. In such a scenario, Peabody will try to capitalize on the export market, leveraging its strength in both Australia and the U.S.
Peabody Energy currently has a Zacks Rank #3 (Hold). Coal operators worth considering with a favorable Zacks Rank are Alliance Holdings GP, L.P. (AHGP), Alliance Resource Partners LP (ARLP) and James River Coal Co. (JRCC). Alliance Holdings has a Zacks Rank #1 (Strong Buy) while Alliance Resource and James River Coal carry a Zacks Rank #2 (Buy).
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