Inside Peabody Energy’s Bankruptcy
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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