On March 24, we issued an updated research report on coal
Peabody Energy Inc.
). Peabody is set to benefit from its presence in two of
the fastest growing coal markets and its exposure in Australia.
However, if the company fails to renew the existing long-term
sales contracts on favorable terms it can impact its
profitability going forward.
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PEABODY ENERGY (BTU): Free Stock Analysis
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Peabody Energy, a Zacks Rank #3 (Hold) stock, reported broke even
results in the fourth-quarter 2013. This compared favorably with
the Zacks Consensus Estimate of a loss of 5 cents and the
year-ago loss of $1.12 per share. The cost saving initiatives and
higher productivity helped Peabody to lower unit costs by 3% for
both the Midwest and Western regions of the U.S. In addition,
higher productivity from its work force helped the company to
offset the impact of lower realized prices.
The Asia-Pacific region is expected to drive global demand for
coal for the next few decades. To capitalize on the surge in
demand, Peabody is expanding its presence in Indonesia and
Mongolia. In addition, in Dec 2013, the company entered into an
agreement with China's Shenhua Group to create Sino-Pacific Coal
Trading Corporation Pte. Ltd. These initiatives will help to
strengthen its footprint in this region.
A well-coordinated transport system plays a vital role in the
success of coal operators, as the coal producing mines are
generally situated far away from the targeted market. Coal sales
can significantly decline due to increases in transportation
costs and the lack of sufficient rail and port capacity. Since
these factors are beyond the control of Peabody, it could largely
impact its sales volume.
Domestic consumption for coal is set to improve 4.6% year over
year to 965.7 million short tons (MMst), as per a report from the
U.S. Energy Information Administration.The projected increase in
coal usage in the U.S. is attributable to higher demand for
electricity and the rising cost of natural gas. Peabody's assets
spread in the Powder River Basin and Illinois Basin will help it
to capture a large part of the rising demand.
However, Peabody will have to ward off competition from other
domestic coal producers like
Alliance Resource Partners
Alpha Natural Resources, Inc.
Arch Coal, Inc.
As a caveat, increasing competition from natural gas and
alternate power generation sources will continue to affect the
demand for coal. In addition, stringent government regulations on
granting permission to coal based power units could negatively
impact the future prospects of coal miners like Peabody.