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Peabody Energy Corp.: 4Q15: Two Steps Forward, Three Steps Back

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Peabody Energy Corp.: 4Q15: Two Steps Forward, Three Steps Back Equity Research Basic Industries | U.S. Metals & Mining 18 February 2016 Peabody Energy Corp. Stock Rating UNDERWEIGHT 4Q15: Two Steps Forward, Three Steps Unchanged Industry View NEUTRAL Back – Reducing Target to $1 Unchanged We saw Peabody’s 4Q15 results as discouraging for the U.S. coal markets in general Price Target USD 1.00 and for the prospects for the stock in particular: The company generated roughly half lowered -86% from USD 7.00 the quarterly EBITDA we had expected as costs ticked up in the Illinois Basin, and the outlook for 2016 appears bleak even when compared to a FY2015 that left Alpha, Arch, Price (16-Feb-2016) USD 2.32 Patriot, and Walter all bankrupt. We’ve seen the company hustle over this past year to Potential Upside/Downside -56.9% make use of every available vehicle for cost and cash savings, but unfortunately Tickers BTU management hasn’t been able to outrun the declines in coal and gas prices. Market Cap (USD mn) 43 Expected 2016 coal sales reflect a substantial volume decline: New guidance calls for Shares Outstanding (mn) 18.50 BTU to produce 184-196mm tons this year (ex brokered tons) compared to 214mm Free Float (%) 99.15 tons in 2015. PRB shipments will absorb the brunt of the reduction. For the domestic 52 Wk Avg Daily Volume (mn) 1.1 coal market as a whole, Peabody’s bleak forecast shows a 40-60mm ton reduction in 52 Wk Avg Daily Value (USD mn) 35.14 lower utility demand and a 150-170mm ton decline in US coal shipments after Dividend Yield (%) N/A Return on Equity TTM (%) -103.62 accounting for electric generators’ inventory destocking and lower exports. Hopes for a Current BVPS (USD) 47.02 long, cold winter to eat into coal stockpiles and push up natural gas prices have faded. Source: Thomson Reuters Without a quick and material recovery in coal prices, Peabody’s financial position will become more precarious: There’s only so much that even aggressive cost cutting Price Performance Exchange-NYSE 52 Week range USD 120.30-2.15 can contribute when PRB prices are flatlining at $10 and spot coking coal remains under $80. Our model indicates negative operating cash flow continuing through 2018 as contract sales reprice lower and offset the positive effect of fuel and FX hedges rolling off. We also believe that in current markets the likelihood of a major asset sale at a multiple sufficient to allow deleveraging also looks more and more remote. Our target price is lowered to $1: With losses mounting, liquidity dwindling, and the company actively seeking to restructure its heavy debt load, we see little intrinsic equity Link to Barclays Live for interactive charting value remaining for the shares. What had been a $1.81 billion cushion of cash and available credit at the end of 3Q15 now stands at $903M as of February 9, with BTU having drawn down all remaining capacity under its revolver. U.S. Metals & Mining BTU: Quarterly and Annual EPS (USD) Matthew J. Korn, CFA 1.212.526.3717 2015 2016 2017 Change y/y [email protected] FY Dec Actual Old New Cons Old New Cons 2016 2017 BCI, US Q1 -6.34A -7.63E -10.30E -9.05E N/A -8.95E -6.34E -62% 13% Kalpesh Patel, CFA Q2 -8.21A -6.92E -9.40E -8.48E N/A -8.49E -6.34E -14% 10% 1.212.526.7519 Q3 -8.13A -7.31E -8.75E -8.22E N/A -8.10E -6.34E -8% 7% [email protected] BCI, US Q4 -8.13A -7.33E -8.54E -7.76E N/A -8.18E -6.34E -5% 4% Year -32.82A -29.19E -36.98E -34.12E N/A -33.72E -28.55E -13% 9% Justin Wieland P/E N/A N/A N/A +1 212 526 1632 Source: Barclays Research. [email protected] Consensus numbers are from Thomson Reuters BCI, US Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 7. Barclays | Peabody Energy Corp. U.S. Metals & Mining Industry View: NEUTRAL Peabody Energy Corp. (BTU) Stock Rating: UNDERWEIGHT Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (16-Feb-2016) USD 2.32 Revenue 5,609 4,771 4,465 4,345 -8.2% Price Target USD 1.00 EBITDA (adj) 415 236 305 306 -9.6% Why Underweight? Weak demand, ample supply, and EBIT (adj) -1,532 -285 -203 -194 N/A depressed prices remain the key trends of the global Pre-tax income -1,990 -834 -757 -752 N/A coal markets, and though Peabody offers investors Net income (adj) -596 -675 -615 -612 N/A production scale and diversification we don't believe EPS (adj) ($) -32.82 -36.98 -33.72 -33.53 N/A the company's efforts at cost-cutting and asset-sales will be enough to maintain support for the stock at Diluted shares (mn) 18 18 18 18 0.2% current levels. DPS ($) 0.04 0.00 0.00 0.00 -100.0% Upside case USD 4.00 Margin and return data Average Our upside case of $4 assumes an 8.0x forward EBITDA (adj) margin (%) 7.4 5.0 6.8 7.1 6.6 multiple applied to a projected 2017 EBITDA of $755 EBIT (adj) margin (%) -27.3 -6.0 -4.5 -4.5 -10.6 million. This higher EBITDA value results from Pre-tax margin (%) -35.5 -17.5 -16.9 -17.3 -21.8 assuming higher prices for met coal, PRB coal and Net (adj) margin (%) -10.6 -14.1 -13.8 -14.1 -13.2 export seaborne thermal coal. ROIC (%) -16.5 -3.1 -2.3 -2.3 -6.1 ROA (%) -5.4 -5.9 -5.7 -6.1 -5.8 Downside case USD 0.00 ROE (%) -68.5 -332.5 152.9 60.9 -46.8 Our downside case of $0 assumes coal prices remain weak for an extended period, US demand for coal Balance sheet and cash flow ($mn) CAGR continues to decline, and BTU is not able to generate Cash and equivalents 261 841 554 323 7.3% enough earnings and cash flows to support its Total assets 10,973 11,439 10,723 10,112 -2.7% business. Short and long-term debt 6,316 7,516 7,516 7,516 6.0% Other long-term liabilities 10,943 11,993 11,993 11,993 3.1% Upside/Downside scenarios Total liabilities 10,103 11,236 11,126 11,116 3.2% Net debt/(funds) 6,054 6,675 6,961 7,193 5.9% Shareholders' equity 870 203 -402 -1,004 N/A Change in working capital 1,228 -95 -59 1 -92.3% Cash flow from operations -105 -241 -156 -101 N/A Capital expenditure -127 -130 -130 -130 N/A Equity free cash flow -330 -621 -286 -231 N/A Valuation and leverage metrics Average P/E (adj) (x) N/A N/A N/A N/A N/A EV/EBITDA (adj) (x) 14.7 28.4 23.0 23.6 22.4 Equity FCF yield (%) -784.3 -1,465.8 -676.2 -546.4 -868.2 P/Sales (x) 0.0 0.0 0.0 0.0 0.0 P/BV (x) 0.0 0.2 -0.1 0.0 0.0 Dividend yield (%) 1.6 0.0 0.0 0.0 0.4 Total debt/capital (%) 87.9 97.4 105.7 115.4 101.6 Selected operating metrics CAGR US coal sales (mm ton) 178 155 152 150 -5.5% US realized price per ton ($) 19.8 19.4 18.0 17.6 -3.9% Australia coal sales (mm ton) 36 35 32 32 -3.9% Australia realized price per ton ($) 56.0 48.7 49.9 50.6 -3.3% Source: Company data, Barclays Research Note: FY End Dec 18 February 2016 2 Barclays | Peabody Energy Corp. Lowering Price Target to $1 We use a probability adjusted scenario analysis to determine our new $1 price target. Our upside case is one in which natural gas prices turn materially upward, coal production in the U.S. contracts substantially as mines close, global seaborne coal markets stabilize, and key coal prices move up by 25% or more. In such an environment our model suggests BTU could earn $755M in EBITDA in 2017, roughly in line with what the company generated for FY2014. With a “normal” 8x EV/EBITDA multiple this would imply a $4 share price. Unfortunately the probability of this outcome appears to be small. We expect curtailed coal production and natural gas drilling activity to restart fairly quickly with any appreciation in energy prices which in turn would cap the upside. Additionally, potential for a structural rebound in domestic coal demand seems remote, even with new uncertainties regarding the Clean Power Plan. We therefore assign a 25% probability that BTU could realize this optimistic scenario. What seems much more likely is that a low-price, declining demand environment remains in place for the next several years – our downside case. Under these conditions BTU’s liquidity would continue to decline rapidly as its EBITDA moves lower (our estimates are for $236M in 2016 and $305M in 2017) on reduced volumes and pricing.
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