Coal producer Peabody Energy is Tuesday's IBD Stock Of The Day as a rise in U.S. natural gas prices helps lift BTU stock close to a buy point.
After falling as low as $5 per million British thermal unit in October, natural gas prices have climbed back to about $6.81 this week.
The Energy Information Administration's weekly natural gas inventory data, due out on Wednesday, could show a depletion after wintry conditions last week, with several feet of snow falling in western New York.
Peabody's U.S. Thermal Coal Business
Higher natural gas prices are among a host of factors that may spur coal utilization heading into winter, Peabody CEO James Grech said on the Q3 earnings call Nov. 3.
Resolution of a potential rail strike also is key to the outlook. Leaders of four railroad unions and management were set to return to the bargaining table on Tuesday afternoon to avert a strike by Dec. 9. The U.S. freight rail network handles about 70% of coal deliveries.
In Q3, Peabody Energy's U.S. thermal coal business delivered $111 million in adjusted EBITDA, up 35% from a year ago.
Grech noted "growing caution regarding the pace of the energy transition" across the U.S., as evidenced by delayed retirements of some coal plants. More than half of U.S. thermal coal sales go to operators for which coal is still the top fuel for energy generation.
Shift Toward Met Coal
Peabody Energy's Q3 results were led by its seaborne thermal coal division, with deliveries primarily to the Asia-Pacific market. Adjusted EBITDA grew 64% to $171 million, as the average realized price rose 31%. Coal is forecast to remain the largest source of electricity generation through 2025.
Peabody's seaborne metallurgical coal segment posted $113 million in adjusted EBITDA. That's nearly double the year-ago figure, but down 38% from Q2 as the average price fell 46%.
Still, Peabody's strategy is to shift long-term production and revenue toward metallurgical coal. Toward that end, the company announced the initial steps in the redevelopment of its North Goonyella mine in Australia, with an initial expense of $140 million.
Peabody's presentation for its Nov. 17 investor day notes that 70% of global steel production relies on met coal. The electric arc furnace process requires an established large scrap base that doesn't exist in newly urbanized economies, according to the presentation.
BTU Stock Buybacks?
Strength in coal prices has strengthened the company's balance sheet. Peabody ended Q3 with $1.35 billion in cash, exceeding debt levels by $485 million.
On Friday, BMO Capital analyst David Gagliano boosted his price target for BTU stock to 31 from 28, keeping a market perform rating. He cited "improved visibility for a solid 2023 and capital returns potential."
BTU Stock
BTU stock climbed 6.7% to 29.62 in Tuesday's stock market action. The coal stock is nearing a 30.15 buy point from a handle at the end of a long consolidation dating back to April.
The handle has been forming since BTU stock's post-earnings surge crested. Tuesday's gain broke the downtrend from the top of the handle, offering an early entry opportunity.
Tuesday's move came in below-average volume. Also, BTU stock is well extended from the 50-day line and is 9% above its 21-day.
