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Sunday, October 25, 2020

Bullish Case for Peabody Energy Corporation (OTCMKTS:BTUUQ)

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Peabody Energy Corporation (OTCMKTS:BTUUQ) has been one of the most important stories of the last few months on the OTC. This is a Chapter 11 play in the thermal and metallurgical coal space. The company was destroyed by a combination of overproduction of coal in China, the broad commodities bear market in 2014-15, and the legislative and societal turn away from acceptance of coal as an environmentally viable energy source. Then, two things happened.

First, due to shortages in coal and increasing demand for steel, the price of metallurgical coal soared higher in October. Metallurgical coal is primarily sold to steel mills and used in the integrated steel mill process. When making steel, two of the key raw ingredients are iron ore and coke. Coke is used to convert the iron ore into molten iron. BTUUQ has become a key player in that space. Second, Donald Trump’s election is a step in the direction of rolling back all major environmental regulations, potentially including those related to coal.

Peabody Energy Corporation (OTCMKTS:BTUUQ) trumpets itself as a company that engages in the mining of coal. The company operates through Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining, Trading and Brokerage, and Corporate and Other segments.

Peabody Energy is involved in mining, preparation, and sale of thermal coal primarily to electric utilities; and metallurgical coal that include hard coking coal, semi-hard coking coal, semi-soft coal, and pulverized coal injection for industrial customers. The company supplies coal primarily to electricity generators, industrial facilities, and steel manufacturers.

As of December 31, 2015, BTUUQ owned interests in 26 active coal mining operations located in the United States and Australia. It also engages in direct and brokered trading of coal and freight-related contracts, as well as provides transportation-related services, which involves financial derivative contracts and physical contracts. In addition, the company operates a mine-mouth coal-fueled generating plant; manages its coal reserve and real estate holdings; and supports the development of Btu Conversion and clean coal technologies.

As of December 31, 2015, the company had 6.3 billion tons of proven and probable coal reserves.

On April 13, 2016, Peabody Energy Corporation along with its affiliates filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri. Peabody Energy Corporation was founded in 1883 and is headquartered in St. Louis, Missouri.

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Since mid-October, shares of BTUUQ have been on a prodigious roller coaster ride, jumping from $1.50 to $18.75, and then back down to oscillate around the mid-point of that range. Hanging in the balance is the question of whether or not there is going to be value for common shareholders in the reorganization plan before the stock re-emerges from creditor protection.

On May 18, 2016, the Bankruptcy Court entered an order approving a Super-priority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), dated April 18, 2016, between the Company, as borrower, Citibank, N.A., as administrative agent and the lender parties thereto on a final basis.

Then, just last week, the company filed a motion with the Bankruptcy Court “seeking, among other things, authority to pay in full all amounts outstanding under the DIP Credit Agreement prior to the scheduled maturity date and confirmation of the Company’s continued use of cash collateral (the “DIP Motion”). The Company expects that the repayment of its obligations under the DIP Credit Agreement will not impact the Company’s rights and obligations under settlement agreements and consent orders with certain state environmental regulatory agencies, including the super priority administrative claims granted pursuant to and in accordance with those agreements and orders, as noted in the DIP Motion and proposed order.”

Note that shares got punished on this announcement. We don’t know for certain why this is the case, but we can venture a hypothesis: this step is likely an immediate precursor to announcing a reorganization plan. And yet, to our knowledge, there has not been an equity committee formation in this process.

Hence, those who piled in full bore looking for the rise in coal prices to guarantee some value for common stockholders in emergence are likely hedging those bets hard upon seeing the exit financing repayment.

At this time, carrying a capital value in the market of $159.1M, BTUUQ has a lot of options on the table right now. It’s main comparable alternative in the market, ARCH, is performing very well, and major Peabody investors probably want to get this behind them. We may have a reorganization plan on the table very soon, so expect a lot of volatility here. We will update the story again soon. For continuing coverage on shares of $BTUUQ stock and our other hot stock picks, sign up for our free newsletter now and get our next hot stock pick!

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