Peabody Energy Corporation (NYSE:BTU) Analysts: Cory Black and Mike Zaccardi January 26, 2010 Price Target: $52.72

Transcription

1 Peabody Energy Corporation (NYSE:BTU) Analysts: Cory Black and Mike Zaccardi January 26, 2010 Price Target: $52.72 Key Information Price (1/22/2010) $ Week High $ Week Low $20.17 Market Cap 12.08B Avg Daily Vol 4.64M Dividend Yield 0.62% Trailing PE Forward PE (2010) Revenue (ttm) $6.35B ROA 6.5% ROE 18.7% Mgmt Owned < 1% Beta (S&P Year) 1.42 Sector Energy Oil, Gas & Industry Consumable Fuels Company Profile Peabody Energy is the world's largest privatesector coal company, with 2008 sales of 255 million tons and $6.6 billion in revenues, including million tons from its United States and Australian mining operations, and 31.2 million tons through its brokerage activities. During 2008, Peabody sold coal to 329 electricity generating and industrial plants in 21 countries. At December 31, 2008, it had 9.2 billion tons of proven and probable coal reserves. As of December 31, 2008, the Company owned majority interests in 30 coal mining operations located in the United States and Australia. In addition, it owns a minority interest in one Venezuelan operating mine through a joint venture arrangement. The Company conducts its mining business through three principal mining operating segments: Western U.S. Mining, Midwestern U.S. Mining and Australian Mining. Its Western U.S. Mining operations consist of its Powder River Basin, Southwest and

2 Colorado operations, and its Midwestern U.S. Mining operations consist of its Illinois and Indiana operations. The principal business of the Company s U.S. Mining segments is the mining, preparation and sale of steam coal, sold primarily to electric utilities. Internationally, the Company operates metallurgical and thermal coal mines in Queensland and New South Wales, Australia, and has a 25.5% investment in a Venezuelan mine. In addition to its mining operations, the Company markets, brokers and trades coal through its Trading and Brokerage Operations segment. Estimated vs. Actual Earnings Orange: Estimated Green: Actual (non GAAP) Blue: Actual (GAAP) *SmartMoney Color on Quarter: 3Q 2009 Peabody reported third quarter earnings of $0.49 per share, excluding non recurring items, $0.26 better than the First Call consensus of $0.23; revenues rose 24.6% year onyear to $1.67 bln vs. $1.42 bln consensus. The company issued upside guidance for FY09, sees EPS of $ , excluding non recurring items, vs. $1.48 consensus; co also raises FY09 EBITDA guidance to $ bln vs. the $1.14 bln consensus. The company is benefiting from very strong international growth, mainly from Australia, China, and India. The company believes that global demand for seaborne coal could grow at 7 8% compounded annually. Going forward, the company sees Australia will be the largest and best beneficiary, likely supplying half of the world s growth. The company also sees growth in China the Chinese government is closing thousands of unsafe mines and consolidating many smaller operations. The company does not see a switch to natural gas with prices for the gas between $6 7 in Revenues by Segment

3 BTU 10Q* Operating Segments Western U.S. Mining Peabody operates in several areas of the Western United States including the Powder River Basin in Wyoming, the Kayenta Mine in Arizona, Lee Ranch Mine in New Mexico, and the Twentymile Mine in Colorado. Australian Mining Peabody Energy Australia has substantial market diversity, domestic and seaborne customers and the capacity to access multiple coal ports and railroads. Peabody currently operates 10 surface and underground mines producing thermal and metallurgical coal in Queensland and New South Wales. The operations together produced 24 million tons in Nearly one third of the world s coal exports come from Australia. The U.S. Energy Information Administration (EIA) forecasts that demand for Australian metallurgical and thermal coal products will grow another 55 percent by Midwestern U.S. Mining Peabody's founder and namesake gained a foothold in the industry in 1883 by plying the streets of Chicago with a wagon full of coal. Today, Peabody's Midwest operations include mines in Indiana and Illinois operated by our affiliates and subsidiaries. The company has a large reserve position and sold more than any other Midwestern coal producer in Coal is shipped primarily to electricity generators and to industrial customers for power generation. Trading and Brokerage Peabody sells coal produced from our operations and brokers coal from other coal producers. The company also trades coal and emission allowances and provides a wide array of transportation related services. Peabody uses its position to supplement its production, hedge against price volatility and satisfy demand for coal supplies where the company does not operate mines. Last year, Peabody nearly doubled its EBITDA contributions from global trading and brokerage activities through worldwide diversification. Largest US Coal Producers

4 Valuation We have a price target of $51.04 for BTU Energy. We used a P/E multiple valuation approach. Using (ttm) P/E ratio of 18.5 and 2010 annual earnings estimate of $2.85/share, we derived a price target of $ This price target is in the median of other analyst s estimates. Other Analysts YahooFinance Peabody Energy vs. Competitors 1 year

5 *YahooFinance Competitors: Arch Coal, Alpha Natural Resources, Consol Energy, Massey Energy Peabody has performed very well over the last year, doubling in stock price. Higher beta competitors have outperformed, however we do not feel that our client would be wellsuited owning the higher beta coal companies as this is a volatile industry. Longer term Performance *YahooFinance Along with many other energy and commodity linked companies, Peabody began to move higher in 2003 when energy prices began to lift. The stock hit an intermediate term peak in 2006, ahead of a market correction that summer, and proceeded to drop significantly. The stock rebounded when energy prices began to surge and share price spiked in mid 2008 when energy prices hit all time highs. The stock bottomed in late 2008 as the equity markets bottomed the following March. The stock has made a fairly linear move higher in the last year, despite short lived significant pullbacks. The stock is currently experiencing one of those significant pullbacks. Technical Analysis

6 Over the last 6 months DTE has been performing quite well. The chart continues to make higher highs and has continued to ride its 50 day MA upwards. RSI is showing a bit of a pullback, but looks like the 50 level is when buyers have been stepping back in. On top of all this, the stock has outperformed the S&P over the last 3 month, 6 month, and 12 month periods. I would wait a few weeks to enter as I think there is room for further pullback or consolidation and would look for an entry point around the $42 level. One worry for me is the long term resistance level DTE is hitting around the $45 $50 range. Technically though, the stock should be an ok buy on a pullback. How BTU makes money Peabody has 30 surface and underground mining operations. They are the only U.S. based coal company with operations in Australia, the world's largest coal exporting nation. They have a growing presence in China and Mongolia and are one of the largest coal trading companies in the world. They are the leading producer in the coal rich Powder River Basin of Wyoming, Colorado and the Midwest. They engage in the exploration, mining, and production of coal worldwide. The company also markets, brokerages, and trades coal. It also develops mine mouth coal fueled generating plants; and develops Btu Conversion technologies, which are designed to convert coal to natural gas and transportation fuels. The company sells its steam coal to electric utilities and metallurgical coal to industrial customers. Peabody sells coal produced from their operations and brokers coal from other coal producers. The company also trades coal and emission allowances and provides a wide array of transportation related services.

7 Strategy Peabody is aiming for growth, attempting to gain profitable reserves in markets favorable to the growth in China and India, and use its large scale operations to be the premium supplier of coal reserves to growth markets while maintaining its leadership in more stable Western markets. It currently has a strong reserve position in the Illinois Basin. Its Powder River mines are also well positioned for above average long run growth. In Asia, the firm has core Australian mines, but is looking for acquisitions. Also, Peabody is trying to gain a toehold in emerging basins such as Inner Mongolia, which offer vast untapped high quality reserves. In 2009, it entered into a JV to develop reserves in the Southern Gobi Desert. Management & Ownership Greg Boyce is Peabody Energy s Chairman and Chief Executive Officer. He was elected to the Board of Directors in March 2005, assumed responsibility as President and CEO on Jan. 1, 2006, and was elected Chairman of the board on Oct. 10, He joined Peabody in 2003 as President and Chief Operating Officer and has extensive U.S. and international management, operating and engineering experience. Previously Greg served as Chief Executive Officer for Energy for Rio Tinto PLC. Mike Crews is Executive Vice President and Chief Financial Officer for Peabody Energy. He was promoted to this position in June He has executive responsibility for the company's financial and accounting functions, including treasury, insurance, bonding, risk management, accounting, financial reporting, tax, planning, forecasting, capital management and budgeting. He joined the company in 1998 as Senior Manager of Financial Reporting and has held a series of financial and commercial positions with the company. Eric Ford is Executive Vice President and Chief Operating Officer. He joined Peabody in January 2007 and is responsible for global mining operations, along with areas of safety, operations improvement, engineering, environmental and geological services. Rick Navarre was named President and Chief Commercial Officer for Peabody Energy in January He has executive responsibility for Peabody's global sales and trading; business development; strategic planning, generation and Btu Conversion initiatives; resource development opportunities; international growth initiatives including China; business performance; and investor relations and corporate communications. Fred Palmer is Senior Vice President of Government Relations. He joined Peabody in February 2001 and is responsible for advancing state and federal policies related to the production and use of coal. Prior to joining Peabody Energy, he served for 15 years as chief executive officer of Western Fuels Association. Alex Schoch is Executive Vice President, Chief Legal Officer and Secretary of Peabody Energy. He joined Peabody in October 2006 with responsibility for all law and corporate secretary functions for Peabody Energy. Prior to joining Peabody, he most recently served as Vice President and General Counsel for Emerson Process Management. 85% of company shares are held by institutional and mutual fund Owners. Largest investors are UBS, Wellington, and Barclays Global Investors. Major Direct Holders share amounts are minimal.

8 3 rd Quarter Earnings Call BTU had a strong quarter based on record Australian volumes and expanding U.S. margins. Year end guidance was increased to $1.60 $1.80 EPS. Revenues equaled $1.7 B, 25% higher than 2 nd quarter results. EBITDA reached $341 million due to higher mining contributions. They had a record quarter for operating cash flow at $429mm with $800mm in cash on hand increasing liquidity to $2.3B. Australian sales were up 30% to $82 per ton. Moving forward, growth will come from China and India with India being the main driver pushing the demand for Thermal Coal and China will be the main driver pushing demand for Met and Seaborne Coal. For 2010, volumes of production were raised with U.S. volumes estimated at mm tons, Australian Met Coal to reach mm tons and thermal exports will reach mm tons. The management team spoke of Peabody s ability to accomplish export growth because of their strategic investments over the past few years. They see exports increasing by 15% in 2010 in Australia and doubling exports within five years. Australia has better geology, lower costs, and rail freight advantages over the Eastern U.S. Green BTU Energy Solutions The company has joined GreenGen, a partnership to build the first commercial prototype for near zero emissions electricity generation with carbon storage. Peabody is the only non Chinese company to participate. Peabody is a founding member of the COAL21 Fund, Australia's near zero emissions technology initiative that is evaluating multiple clean coal demonstration projects. Peabody has joined The Powertree Carbon Company LLC, a consortium of 25 major U.S. power companies funding six major reforestation projects along the Lower Mississippi River. The company participates in the Midwest Geological Sequestration Consortium, a regional partnership to advance carbon dioxide storage. BTU is a member of the Asian Pacific Partnership for Clean Development and Climate, a consortium of major Asian nations, the business community and the United States to develop and transfer technology to address energy security, emissions reduction needs and climate change. Peabody supports the U.S. Department of Energy's Vision 21 power plant of the future, a concept developed in the late 1990s. The Vision 21 plant would be ultra efficient, emit almost no emissions and sequester carbon dioxide using coal as its fuel source. BTU has committed $3 million for the Power Systems Development Facility in Wilsonville, Ala., an advanced coal gasification generating facility supported by the Department of Energy and leading generators and equipment manufacturers. After it is perfected, the technology has the potential to boost efficiency and produce lower emissions. * * Peabody Energy.com Fear China concerns over curbing growth Increasing dollar may hurt the price of Coal

9 U.S. regulation requiring less use of coal in electricity Warmer second half of winter due to El Nino Climbing U.S. coal stockpiles Greed Cap and Trade less of a concern due to Republican victory Global leader in coal production Strong international presence Highest Chinese imports on record Recommendation We recommend selling one position of XLE all and purchasing one position of BTU at a limit price of $ Should the limit trigger, we recommend a stop at