Peabody Energy, the world’s largest private sector coal producer, has suspended its dividend as low fuel prices upset plans to become a cash machine for shareholders.
Demand for coal has been falling in the US and a warm winter across much of the northern hemisphere has pulled down the price of natural gas, making it cheaper than coal for power stations.
In the US, Peabody’s largest market, hundreds of coal-fired power plants are being permanently shut down in the face of state environmental legislation and more competitive alternatives. Meanwhile, investors concerned about the climate impacts of burning coal have also shunned the sector, raising producers’ cost of capital.
“Peabody Energy is getting hammered by weak coal industry fundamentals and escalating [environmental, social and governance investing] concerns,” said Ben Nelson, Moody’s lead coal analyst.
After the bankruptcy, Peabody restarted its dividend in early 2018 in what former chief financial officer Amy Schwetz said demonstrated its “robust cash generation potential”. Last year the company paid $258.1m in dividends — the most since 1995, according to S&P Global Market Intelligence — and repurchased $329.9m in stock.
As it reported results on Wednesday, Peabody said the dividend and share buybacks would halt and capital spending would fall by 12 per cent to $250m this year. “For 2020, the company is taking a ‘live within our means’ approach given changes in industry conditions and the operating portfolio,” Peabody said.
The company reported revenues of $4.6bn in 2019, the lowest in 12 years, and an after-tax loss of $188.3m from continuing operations. It warned of a “challenging backdrop to start the year”.
In the US, winter heating demand during the peak December-to-February period will rival record weakness set during the extremely warm winter of 2015-16, according to Rich Redash, head of global gas planning at S&P Global.
Peabody, based in St Louis, Missouri, emerged from bankruptcy protection having shed $5.2bn of debt. The activist hedge fund Elliott Management, a former debt holder, gained the largest equity stake in the company and now owns about 30 per cent.
Under an agreement disclosed on Wednesday, Peabody will add four directors including three appointed by Elliott: Dave Miller and Samantha Algaze, both from Elliott, and Darren Yeates, a former executive from the miner Rio Tinto.
“We are convinced that Peabody has significant unrealised potential,” Mr Miller said.
Investors responded positively, sending Peabody’s shares up 25.6 per cent to $9.31. A year ago Peabody was $33.68 a share.
In the US, coal consumption last year fell below 600m short tons to the lowest levels since the 1970s as other fuels are used to generate electric power, according to the Energy Information Administration. Peabody said its coal volumes from Wyoming’s Powder River Basin fell 8 per cent year on year in the fourth quarter, while volumes from mines in Illinois and Indiana dropped by 20 per cent.
To save $120m a year in costs, Peabody is seeking government approval to form a joint venture with rival Arch Coal that would include the world’s largest coal mine by volume, North Antelope Rochelle in Wyoming.
Volumes and revenues also declined for Peabody’s Australia-based coal businesses, which mainly serve export markets for power generation and steelmaking.