A Snowball’s Chance: “Re-Energizing Peabody” Bucks 20 Year Industry Decline

By Jonathan Naimon, Light Green Advisors:


Peabody sales of thermal coal to US utility were in a long term decline along with its stock price before President Obama announced a plan to reduce  US greenhouse gas emissions by 17% by 2020.  While Ms. Doherty is certainly  correct that US politicians including Obama are as unlikely to jeopardize a fuel supply that produces 50% of US power supply, however, the nation’s financially conservative electric utilities have no such qualms and have already reduced thermal coal’s role as fuel for US power consumption from close to 50% to under 40% in last 10 years – faster than the regulatory goals.  The reasons for the utility industry shift are not purely related to climate: natural gas is less expensive on an inflation adjusted basis, natural gas reduces the operational and capital expense uncertainty associated with upcoming EPA greenhouse gas regulations, natural gas does not require determining appropriate reserves for ash waste management, and as a fuel source,  natural gas generates no particulates and contains no toxic and increasingly regulated mercury.

Peabody management realizes the decline of its primary product, thermal coal for the US utility market, is inexorable.  The company’s defensive debt-producing acquisition of MacArthur coal was required to provide its investors with at least some growth in the increasingly Asian market for metallurgical coal used in steelmaking.  The company’s closure of US mines is a reflection of a structural shift away from coal among US utilities and a smaller future US market.

In contrast to coal, the natural gas industry has created billions of dollars of new shareholder wealth above and beyond the wealth destroyed by the coal industry. The natural gas industry has created literally millions of blue collar jobs in an era where few industries do. While technology associated with coal mining and burning has not advanced materially in recent years, the revolution in natural gas extraction technology has led to sizable investment in the US gas industry by many global energy firms from both Europe and Asia. Utility scale combined cycle natural gas turbines can now generate approximately 40% more energy per BTU than commercial coal systems.

Perhaps the most delicious “market-eats-politics-for-breakfast” irony is that according to the International Energy Agency, the US, not Germany, is the sole developed economy that has  reduced its greenhouse gas intensity as a result of a combination of more fuel efficient vehicles, and the substitution of natural gas for coal by electric utilities — in the five years preceding Obama’s recent proposal!

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