Peabody Energy (BTU) Q2 Loss Marginally Wider than Estimates

Coal producer Peabody Energy Corporation (BTU) reported a loss per share of 28 cents in the second quarter of 2014, marginally wider than the Zacks Consensus Estimate of a loss of 27 cents.

The company reported earnings of 33 cents per share in the year-ago quarter.

The reported loss was however within the company’s guidance range of a loss of 39 cents to 14 cents per share as issued during the first-quarter earnings release.

Revenue

Peabody’s quarterly revenues of $1.76 billion improved 1.9% year over year and surpassed the Zacks Consensus Estimate of $1.65 billion by 6.6%.

Overall improvement in sales volumes in the reported quarter and higher realized prices of U.S. tons sold helped the company to beat the top-line estimate.

Operational Update

Total sales volume in the quarter was 61.7 million tons, up 1.5% from the prior-year level. This was primarily due to higher sales volume from Western U.S. Mining Operations and Australian Mining Operations.

Operating costs and expenses incurred in the reported quarter increased 2.1% year over year.

Revenues per ton, in the U.S., edged up 1.1% year over year to $22.27, while revenues per ton in Australia decreased 15.4% to $73.16.

Financial Update

As of Jun 30, 2014, Peabody had $498.4 million in cash and $548.4 million in inventories versus $444.0 million in cash and $506.7 million in inventories as of Dec 31, 2013.

Long-term debt as of Jun 30, 2014, was $5.98 billion versus $5.97 billion as of Dec 31, 2013.

Guidance

Peabody expects third-quarter 2014 adjusted EBITDA in the range of $140 million to $190 million and the bottom line in the range of a loss per share of 53 cents to 40 cents.

The company lowered its 2014 total sales target to 245–260 million tons from 245–265 million tons. The U.S. sales target is down to 185–190 million tons from 185–195 million tons while for Australia the guidance remained unchanged at 35–37 million tons.

The company lowered the full-year capital spending projection to $210–$250 million from $250–$295 million given weak demand.

Upcoming Releases

Alliance Resource Partners LP (ARLP) is slated to release its second-quarter 2014 earnings on Jul 28. The Zacks Consensus Estimate is 97 cents.

CONSOL Energy Inc. (CNX) is slated to release its second-quarter 2014 earnings on Jul 24. The Zacks Consensus Estimate is 28 cents.

Arch Coal Inc. (ACI) is slated to release its second-quarter 2014 results on Jul 29. The Zacks Consensus Estimate is pegged at a loss of 48 cents.

Our View

Peabody projects that nearly 250 gigawatts of new coal-fueled generation will be built over the next three years on a global scale, requiring an additional 750 million tonnes of thermal coal. Peabody could benefit from rising coal demand in China, India and to some extent Japan thanks to its Australian platform.

In the U.S. intensifying regulations to reduce the carbon footprint are taking a toll on the coal companies. Recently, the U.S. Environmental Protection Agency announced the Clean Power Plan, which aims to cut carbon emissions from existing power plants by 30% over the 2005 to 2030 time frame. If implemented, it would delve a big blow to coal producers like Peabody.

In addition, railroad congestions in the U.S. might continue to impact Peabody in the second half of the year. So, we do not expect any near-term respite for the company. However, the World Steel Association projects a 3.1% increase in global steel usage in 2014. Renewed demand for metallurgical coal might therefore lend some support to Peabody.

Peabody Energy Corp. currently holds a Zacks Rank #4 (Sell).