• 14 hours Oil Pares Gains After API Reports Surprise Crude Inventory Build
  • 15 hours Elon Musk Won’t Get Paid Unless Tesla Does “Extraordinarily Well”
  • 15 hours U.S. Regulators Keep Keystone Capacity Capped At 80 Percent
  • 16 hours Trump Signs Off On 30 Percent Tariff On Imported Solar Equipment
  • 18 hours Russian Funds May Invest In Aramco’s IPO To Boost Oil Ties
  • 19 hours IMF Raises Saudi Arabia Growth Outlook On Higher Oil Prices
  • 20 hours China Is World’s Number-2 In LNG Imports
  • 1 day EIA Weekly Inventory Data Due Wednesday, Despite Govt. Shutdown
  • 1 day Oklahoma Rig Explodes, Leaving Five Missing
  • 2 days Lloyd’s Sees No Room For Coal In New Investment Strategy
  • 2 days Gunmen Kidnap Nigerian Oil Workers In Oil-Rich Delta Area
  • 2 days Libya’s NOC Restarts Oil Fields
  • 2 days US Orion To Develop Gas Field In Iraq
  • 4 days U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 4 days Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 4 days Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 5 days Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 5 days Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 5 days TransCanada Boasts Long-Term Commitments For Keystone XL
  • 5 days Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 5 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 5 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 5 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 6 days Venezuelan Output Drops To 28-Year Low In 2017
  • 6 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 6 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 6 days Kinder Morgan Delays Trans Mountain Launch Again
  • 6 days Shell Inks Another Solar Deal
  • 7 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 7 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 7 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 7 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 7 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 7 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 7 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 7 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 7 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 7 days Norway Grants Record 75 New Offshore Exploration Leases
  • 7 days China’s Growing Appetite For Renewables
  • 8 days Chevron To Resume Drilling In Kurdistan
Alt Text

Why China Can’t Shake Its Coal Dependency

China’s drive to reduce its…

Alt Text

Federal Regulators Deal Huge Blow To The Coal Industry

The Federal Energy Regulatory Commission…

Peabody Energy (BTU): Time To Pick Up The Knife

Peabody Energy (BTU): Time To Pick Up The Knife

There is an old cliché often cited by traders that attempting to catch a falling knife is an extremely dangerous thing to do, but that doesn’t mean that picking one up off the ground isn’t occasionally worth the risk. The phrase “The U.S. coal industry is dead…” has been uttered so many times in the last six months that it has become conventional wisdom. Stocks in the industry have fallen in spectacular fashion, with those companies that have avoided bankruptcy so far losing over 90 percent of their value over the last five years or so. Peabody Energy (BTU) is no exception, but at these super depressed levels BTU may represent an opportunity for nimble traders with an appetite for risk.

The fact is that the coal industry, while undoubtedly in dire straits, is not dead yet, it’s just that stocks are priced that way. That doesn’t mean that coal has a bright future, it certainly doesn’t, but if conventional wisdom is put to one side it is hard to state that it has none at all. Coal still accounts for around 40 percent of the world’s electricity, and according to the IEA, overall demand will rise through at least 2019. Related: The End Of The Beginning For Renewable Energy?

(Click to enlarge)
Figure 1: BTU 5 Year Chart. Source: VectorVest

Coal prices, and stock in companies that produce it, have not tumbled without good reason, however. The big drop in oil prices last year dragged all energy prices with it but coal was particularly hard hit for many reasons. Firstly, the demand outlook for coal has worsened considerably. China has cut imports massively; the total imported fell 42 percent on an annual basis in the first quarter of this year. A political push to reduce emissions, cheaper natural gas and slowing growth in the economy have combined into a perfect storm for coal in what was, until recently, the world’s fastest growing economy. Those same factors have also reduced demand in the U.S. and most of the world…with one notable exception. Related: Fossil Fuel Divestment Could Be A Red Herring

India, the third largest importer of coal in the world, and now the fastest growing economy in the world according to the latest estimates, actually increased coal imports in 2014/5 by a respectable 19 percent. As India imports primarily from Australia and Asia, that is of little use to most U.S. producers, but once again with one notable exception…Peabody Energy. Around 40 percent of that company’s revenue comes from their Australian operations, so they are uniquely placed amongst U.S. producers to benefit from continued growth in India.

That alternative revenue source, combined with some aggressive action by management to cut U.S. costs earlier this month, makes Peabody a likely survivor as the industry collapses, and that, in turn, makes the 97 percent decline in the stock price look somewhat overdone. At around $2.40 at the time of writing, BTU looks like the risk reward ratio has swung in its favor. With over 30 percent of the total stock being sold short, simply a lack of bad news over the next few weeks could be enough to generate a significant rally. There is a downside, for sure, most notably if the current crisis forces a massive increase in insurance costs, but there is an awful lot of bad news priced in at these levels. Related: Midweek Sector Update: Oil Gloom Spreading To Natural Gas Market

It should be stressed that this is a trade idea, not an investment. There is still an enormous amount of risk and a total loss is a possibility, so only capital set aside for high risk trading should be used. It seems, though, on examination of the evidence, that the market is overestimating the risk of bankruptcy for BTU. From a long term perspective investing in a coal company may seem like stupidity in the extreme, but this is not a long term trade. The idea is to benefit from an oversold position at these levels and a short squeeze that will almost certainly come at some point. On that basis a strong argument can be made that the knife that is BTU has already hit the floor, and picking it up here may be a smart thing to do.

By Martin Tillier of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News