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Peabody Energy, a coal juggernaut and one of the world's largest private-sector coal players with a legacy of 133 years, is now bankrupt. To the shock of many, the once iconic coal company filed for Chapter 11 bankruptcy in St. Louis late this spring.

The Question on Everyone’s Mind is, “What happened?”

A couple of decades ago, coal was the source of more than half of America's electricity and much of it was brought to the market by Peabody. But, from a local peak in 2011, the company’s stock price fell over 800% through early 2016. Its market capitalization went from $20 billion to around $30 million over that time.

On one hand, the rise of fracking technology and cheap shale gas in the U.S., coupled with stricter environmental regulations and weaker demand from China, has edged hundreds of coal-fired power plants out of business. The tempered demand for coal that resulted has severely dented U.S. coal production nosediving from 1.17 billion metric tons in 2008 to just 752.5 million in 2016.

Not only was the industry producing less, they were also getting paid less for production. Coal prices have declined by more than 75% from a peak in 2011.

All of these factors led to compounded financial pressure on coal companies and were exacerbated by mounting cost burdens of pensions and retiree health care obligations. As a result, many small and large coal companies filed for bankruptcy.

Inside Peabody’s Bankruptcy

After starting out in Chicago in 1880 with just a wagon and two mules, Peabody later became the undisputed giant of the mining industry. But, following the 2008 financial crisis, evidence of persistent weakness and struggling financials started to appear. Between 2012 and 2015, Peabody laid off more than 20% of its global workforce and started closing some of its U.S. mines.

But, Peabody’s downfall might be better attributed to their doubling down at just the wrong time. They made a huge bet on increasing coal sales to China, which was tied to an unwise debt-fuelled decision to acquire Macarthur Coal (an Australian mining firm that supplied coal to the steel industry). They paid a whopping $5.1 billion for Macarthur in 2011, essentially at the peak.

Just as they made these bets, the demand for metallurgical coal in China decreased drastically as the nation's rapid industrial growth hit its saturation point. Demand tapered off each year and eventually led to a fall of Chinese coal imports by nearly 30% in 2015. In 2000, China’s steel production was growing at astonishing 15.7% each year, but in 2015 it actually declined -2.1%.

Despite Peabody’s best efforts to secure a future for its extractive business model, with the structural collapse of the global coal market (especially China) and the company’s inability to recover debt, there was no path forward. They are now facing bankruptcy court in the U.S., with $10.1 billion negative net income and less than $30 million market capitalization.

Bottom Line for Investors

The Peabody story isn’t necessarily a narrative for the broader coal industry, as presently 40% of global electricity is being fuelled by coal. Developing nations still value it as a top energy source and, since that’s where a great deal of infrastructure build-outs are coming from, coal is likely to be around for decades to come.

Still, over the longer term it seems likely that, with increased accessibility to natural gas and continued activism around curbing coal consumption, companies focused on coal will have a challenging road ahead.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

At last count, there were 59 Chapter 11 bankruptcy filings from companies in the oil and gas business. The Energy sector, as a whole, has felt the hit profoundly with earnings falling -56.4% in Q3 2015 and -78.6% in Q4 2015. For Q1, the damage is estimated to be even worse, with the current Zacks estimate being a -114.5% earnings drop in Q1. The latest two companies to file for bankruptcy were Midstates Petroleum (ticker: MPO) and Ultra Petroleum (ticker: UPO). Additionally, with a handful of other small players likely in line at bankruptcy court, it may not be long before the oil and gas sector overtakes the 68 bankruptcy filings seen by Telecom during the dot com bust in 2000. We believe the sector is in the long process of bottoming out, but it may be too early to start-in on the bullish bets. On the earnings front, one of the latest reports from a big player came from Royal Dutch Shell, which reported a 63% decline in earnings per share for Q1.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

A Tug-of-War Week for Oil – crude oil prices endured a volatile week. It started with the collapse of the Doha talks – not surprisingly, Iran made a last minute decision to skip the meeting, which almost certainly irked Saudi Arabia. For market participants, this also created fears that no production freeze would be possible (it’s still uncertain for OPEC nations). But then later in the week, oil got a boost when Kuwaiti oil workers went on strike for three days, cutting production nearly in half for the nation. Fast forward to the end of the week when supply concerns resurfaced rapidly after data from the American Petroleum Institute showed that the U.S. oil inventory had grown by 3.1 million barrels over the last week. Oil bounced around quite a bit, but seems to want to call the $30-$40 barrel price range home. Still, the market is waiting for the ‘fear’ to fade which will most likely result after a consistent price of an oil barrel is reached.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This weekend could be very meaningful for crude oil prices, as a Doha meeting between 75% of the world’s producers could determine a new course for production levels. There is increasing evidence that U.S. production has been falling while OPEC leaders have shown increasing indication to potentially “freeze” production at current levels, or at least at some agreed upon level. The oil market is already naturally adjusting to a new dynamic of lower prices and demand constraints, so it’s inconclusive whether a freeze would actually have meaningful impact at this stage. But, it would at least mean that the opposite (increased production) wouldn’t be true. Iran and Russia remain the wildcards ahead of the meeting (surprise, surprise), where anything they may promise is shaky at best.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

The Standard & Poor’s and Moody’s ratings agencies recently downgraded energy giants like Chevron, EOG Resources, Royal Dutch Shell and Hass. Top-tier companies, once thought fairly insulated from oil’s downturn due to their sheer size, are now seen as under serious stress. Is this energy issue going to keep getting worse?

Indeed, more than 120 of the world’s largest energy companies were downgraded following Moody’s revision of its oil price estimate to $33 per barrel from $43. Lower oil for long periods of time mean weakened cash flows and increased financing costs as companies find it more difficult to fund capital projects at current oil prices.

With U.S. production exceeding oil demand by more than 2 million barrels per day (bpd), and with Iran producing an additional 500,000 bpd in 2016 (with the removal of western sanctions on Iran), rating agencies are convinced it could be years before oil prices recover in earnest. Ratings agencies claim that lower oil coupled with weak industry fundamentals presents substantial risk to corporate health looking forward, hence the downgrade.

But what does a ‘downgrade’ really tell us? In reality, it’s nothing more than ratings agencies telling us something we’ve already known for some time – yes, the Energy sector is under some duress, and risks are rising. But, to downgrade a company one letter (A to B) or one notch of a letter (AAA to AA) doesn’t provide palpable investment insight. It tells us to be on alert, which we’ve already been for months and months. In other words, it’s fair to say that ratings agencies give us a reflection of the market, but are by no means leading indicators.

Case in point: Standard & Poor’s made headlines in August 2011 when it downgraded America’s AAA credit rating. But, this rating revision became public only after the U.S. Treasury had publicly claimed that it had its deficit projection wrong to the tune of $2 trillion. So, it is clearly evident that the agency is not telling the investor community anything new.

There are also examples of ratings agencies outright failing to perform their function. Perhaps the most notable in history came regarding the 2001 Enron scandal, where the rating agencies didn’t downgrade the company until a few days prior to its bankruptcy! There’s also the fact that Standard & Poor’s agreed to pay a $1.5 billion penalty for failing to assess the exorbitant risks present in the subprime mortgage CDO market. There were even instances where AAA ratings were assigned to large volumes of “toxic” mortgage-backed securities and collateralised debt obligations before the financial crisis. A huge miss.

Yet, in spite of this track record, rating agencies have emerged pretty much unscathed – even in a world where many investor decisions to hold a particular type of debt depends on their ratings. Every time a downgrade occurs, it seems to make big news. We’re not sure why.

Bottom Line for Investors

Investors shouldn’t get too caught up in downgrades of the minor sort, especially when it’s related to an industry or company that’s already widely known to be feeling some pressures. Ratings agencies are notorious for being late to the game. Still, if you’re looking for perspective on what may lie ahead for the stock market, download the latest Zacks Stock Market Outlook report. This is a must-read when you are considering which stocks to buy or sell.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Mitch on the Markets (Special Edition)

Crude oil’s continuing downward spiral has left many puzzled, some unemployed and others bankrupt. As the WTI (oil pricing benchmark) plunges to below $30 per barrel, concerns about the Energy sector intensify, especially as there appears to be no clear indication of a rebound in the near term. Fluctuating profit margins are par for the course for the sector. Still, cratering oil prices have cost the U.S. oil and gas sector 70,000 jobs (200,000 worldwide) and growing negative sentiment has been reflected in equities too – this sector within the S&P 500 lost over 25% last year.

Although Energy, as a whole, is experiencing tough times, there are some within the industry facing even harsher conditions. These are mainly the regional, independent oil producers in the U.S., who only two years ago were the darlings of investors in fast growing business.

The Shale Revolution Loses Steam

The oil price slide has deeply bruised regional oil producers such as those in Texas and North Dakota. Sharp reductions in their oil rig count underscores the pain: Bakken in North Dakota has seen its rig count drop to 44 from around 200 four years ago and Texas has cut its rig count to 294 from about 750 last year. This is in stark contrast to the regions’ immensely prosperous times when the shale oil revolution helped them outperform markets even during the Great Recession.

Micro-economies are bearing the brunt of the downturn – North Dakota once saw rapidly accelerating employment, owing largely to shale production, and was one of the highest employment generating regions in the nation. In fact, growing popularity of the region was evident in its housing rents that were said to rival big cities.

There were and are numerous small regional drillers and refineries pressed with hard times but, to give you an example, let's look at the Dakota Prairie Refining, LLC. Before the oil price collapse began, refineries would benefit by purchasing oil from shale producers and then pocket a profit by selling more expensive refined output, namely diesel. Envisioning a similar objective, Dakota Prairie Refining LLC invested in its plant in 2014 at a time when diesel was selling at $100 more than the drilled oil near Bakken oil field. Unfortunately, the refinery was hit by losses soon after it began operation in May 2015 amid sharply falling diesel prices. Currently, diesel is selling in the region at just $16 more a barrel than the oil produced – not enough to stay in business.

One big problem with smaller refineries like Dakota Prairie is that they lack the adequate capacity and infrastructure to sell output to other regions. With less scope for competing in larger markets, the regional small players are the most hard-hit with falling oil prices.

Bigger Players Down, but Not Out

On the other hand, large U.S. oil corporations, though faced with challenges, seem to be in better shape compared to their regional counterparts. One of the reasons is that many of them are integrated oil companies – earnings from downstream operations bolstered by lower crude oil costs have offset, to some extent, reduced earnings from upstream operations. Exxon Mobil, for example, reported a decline in upstream earnings of -84.3% but a gain of +34.2% from combined downstream and chemicals earnings (Q4 ‘15 vs. Q4 ’14). Also worth noting is that Exxon’s earnings are still in the positive territory.

Furthermore, larger corporations are adhering to cost disciplines amid plunging oil prices. Chesapeake Energy, for instance, has reduced capital expenses by -59% in Q3 2015 from a year ago. Such cost management tactics will likely help companies generate profits when oil prices start to rebound.

Even though companies, large and small, are suffering in varying degrees due to falling oil prices, the larger ones will likely be better positioned when prices take a more favorable turn. Integrated oil corporations could take advantage of lower prices now to stock their oil reserves at lower costs and sell products at a higher price once fuel prices start to improve.

Bottom Line for Investors

Although Energy companies’ prospects are still largely uncertain in the near-term, it’s difficult to overlook the possibility of big gains if oil bounces back. Big U.S. corporations in the Energy space may be experiencing declines in earnings at present, but they are likely going to be some of the biggest gainers when oil rebounds. The opportunistic investor would see it this way: the current bearish sentiment regarding Energy equities could just as quickly turn into bargain buying opportunities.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

Steady Investor’s Week

Earnings Down, but Not Out – Q4 2015 results are in from 173 S&P 500 members, who combine for nearly half of the index’s total market capitalization. It’s been a bumpy start to say the least – total earnings for these reported companies are down -1.6% from the same period last year on -1.9% lower revenues (with 72.8% beating EPS estimates and 47.4% coming ahead of revenue estimates). The Energy drag is still very much in play, but Q4 is different from Q2 and Q3 in that earnings would probably be negative even if we excluded the Energy sector from the picture. The stronger dollar is costing corporations billions and cyclicality is also to blame here. For the quarter, Zacks expects an earnings decline of -5.8% on -4.4% lower revenues, which would mark the third consecutive quarter of earnings declines for the index. But, a detailed analysis will reveal that it’s really a patchwork of weaknesses and strengths, not just weaknesses. Facebook (ticker: FB), for instance, blew away Wall St. estimates and posted more than $1B in quarterly profit for the first time ever.

Russia’s Economy Has Seen Better Days – Russia’s energy-dependent economy has seen better days. In 2015, Russia’s economy contracted by its greatest amount since 2009 on lower oil prices and the impact of U.S. and European sanctions over the conflict in the Ukraine. Data shows that Russian GDP fell a steep 3.7% last year after posting a little growth in 2014. It goes to show just how much pain a non-diverse economy can feel when its bread and butter revenue generator ‘goes south.’ Many investors think Russia is bigger and more impactful than it is, but it’s actually quite small relative to the world – only accounting for about 3% of global GDP. On the bright side, there can be a strategic advantage to a contracting economy – consumers need to rein in spending and tend to do a lot of budget shopping. Maybe that’s why McDonald's is planning to open more than 60 restaurants there next year.  

Time to be More Bullish on Europe? – The head of the European Central Bank (ECB), Mario Draghi, is a pretty straight shooter. At last count, he has kept all of his promises regarding adding whatever stimulus Europe needed to spur growth. He’s just, generally, been slow to act. Europe’s quantitative easing program essentially started when the U.S.’s ended, though the programs should have been running at the same time. Better late than never and, this week, Draghi made it clear that the bank will do what’s necessary to maintain its inflation mandate in order to also maintain its credibility. In a little under two months, ECB policymakers will meet to decide whether to continue the €1.5T bond-buying program and negative interest rates as mechanisms to stoke growth and inflation. I’d count on it, and the extra liquidity has shown a tendency to flow to stocks.

The Fed Takes a Pause - The Federal Reserve met Wednesday and decided to keep interest rates unchanged for now, which was largely expected. They may even stay put at the next meeting too as, in the past year, they’ve shown a tendency to back-off of hawkish talk when the markets turn volatile.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

Steady Investor’s Week

Junk Bond Bear Market? – Since around mid-2014, junk bonds have felt the sting of declines particularly as crude oil prices have fallen. A sizable portion of the high yield market is based in commodities companies’ debt, which has been hit across the board as gas, oil, iron ore, and coal prices have declined. But two issues emerged this week that added fuel to the fire. The first was the Fed rate hike and language related to gradual hikes over the next three years, which stoked fears about tighter credit markets moving forward. The second was more ‘panicky’ in nature, when the investment firm Third Avenue Management froze withdrawals from its ~$1B high-yield bond fund. Markets of all kinds generally do not like restrictions and new regulations, and the move induced some warranted fears. The high yield category declined some 5% in the third quarter alone, which has ultimately resulted in the first negative year since 2008. With more rate hikes ahead and a general sense of monetary policy tightening from here, we don’t expect a “v-shaped” bounce in the junk bond market.

Natural Gas and Crude Oil Prices Keep Tumbling – natural gas prices in the U.S. have now sunk to their lowest level in over ten years this week. A late winter onset in the Northeast is largely to blame, with mild temperatures tempering demand/usage. Crude prices have felt similar pressures, but mostly on continued oversupply concerns. At one point this week, oil traded below $35 a barrel. We continue to think oil prices are in a bottoming pattern here, though expectations for an actual rebound in price could be a few months off.

U.S. Lawmakers Could Lift Ban on Crude Exports – after nearly four decades, U.S. lawmakers have finally made moves to lift the ban on crude oil exports that resulted from the 1973 Arab oil embargo. The deal is a win for Republicans who attached it to a spending and tax package, which will be voted on as early as Thursday. On the other side of the aisle, a win came in the form temporary wind and solar power tax credits set to expire several years down the road.

The Federal Reserve Raises Rates! Now What? The Federal Open Market Committee met Wednesday and announced the first hike to the benchmark interest rate since June 2006, from the zero bound to 0.25% - 0.5%. Janet Yellen said in her statement that she expects the FOMC to raise rates to 1.5% by the end of 2016 and 2.5% by late 2017, with a longer-term goal of getting the benchmark rate to historical averages (3.5% or so) by 2018. The market response to the Fed’s interest rate was nicely positive, with the S&P 500 rising +1.45%, but we’d be more cautious looking ahead. As gradual rate hikes start to create modest headwinds to the already leveling economy, more volatility could set in. A handful of big banks already announced they would increase their prime rates in the wake of the announcement.

Certainly, The Fed is getting more active - should you?  Have a look at the latest Stock Market Outlook report for insights on how to manage your investments...

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.