Even Under Trump, U.S. Coal Giant Plots a Cautious Comeback

(Bloomberg) -- President Donald Trump has been offering coal companies everything under the sun –- fewer regulations, more land to mine, a freer pass from concerns about climate change. The combination, he says, will put coal miners back to work.

But the nation's biggest coal miner, Peabody Energy Corp., is touting a less grandiose strategy. It's no longer looking -- or expecting -- to boost coal output significantly, said Chief Executive Officer Glenn Kellow Tuesday, after his company emerged from yearlong bankruptcy. Instead, he's focused on a narrower objective: simply making money.

“We're much more interested in growing shareholder returns, shareholder value, than we are on growing tons of volume,” Kellow said in an interview at Bloomberg headquarters in New York.

The approach underscores just how cautious those in the U.S. coal sector remain even as Trump's cheer-leading fuels a nascent sense of optimism. After years of pain that culminated with a rash of bankruptcies including Peabody's last April, coal miners are benefiting from higher prices and increased interest from Wall Street. Arch Coal Inc. emerged from bankruptcy in October and Ramaco Resources Inc. in February held the sector's first initial public offering in two years.

Peabody rose as much as 4.6 percent to $28.50 and were trading at $27.85 at 10:30 a.m. in New York. Shares opened at $32 Tuesday on the company's return to equity markets.

Renewables Growth

But there's still doubt about Trump's ability to stoke fresh demand for the fossil fuel at a time when utilities are building plenty of gas-fired power plants and not coal-fired units. Meanwhile, renewables keep eating into the country's electricity generation market. And China's decision to curtail its own coal production last year -- the primary reason coal prices skyrocketed -- could just as quickly be reversed.

In the face of such uncertainty, Kellow suggested that his main job is to double down on the St. Louis-based company's best assets -- ranging from underground mines in Illinois to large open pits in Wyoming and Australia -- and to operate them with an eye toward keeping debt levels low and paying shareholders a dividend as soon as 2018.

“We're in very competitive markets, we have strong margins from the assets that we have and we compete very well,” Kellow said. “Our passion, our focus is going to be about driving for those shareholder returns.”

Shareholders before the bankruptcy filing were denied a recovery by a judge in January.

For more on U.S. coal's new playbook amid shrinking demand, click here.

While as much as 50 gigawatts of U.S. coal-fired power plants may shut in the next five years, the remaining fleet of coal plants will probably operate at a higher capacity, Kellow said. That could keep coal's share of the overall U.S. electricity generation mix around 30 percent for the next decade, he said. And Trump's policies could wind up preventing the closing of some of those 50 gigawatts, he added.

Bad Bet

Critics argue that Peabody's plan is still too grandiose.

“As utilities continue retiring coal plants and renewable energy production soars, Peabody is betting on a coal revival that simply isn't going to happen,'' Mary Anne Hitt, director of Sierra Club's "Beyond Coal Campaign," said in a statement. “Peabody is once again putting workers, communities, and even its shareholders at risk.''

Peabody isn't sitting still. It plans to increase production in the next four years by 17 percent in Wyoming's Powder River Basin compared to 2017, according to an analyst note from Clarksons Platou Securities Inc. It also plans to raise output by 11 percent in the Illinois Basin. 

But in Australia, Peabody's now looking to streamline its operations instead of expand them. In 2011, the last time coal prices spiked, Peabody -- under previous CEO Greg Boyce -- spent $4 billion to acquire MacArthur Coal Ltd,. in a bet that metallurgical coal prices would stay high. Prices promptly crashed for the steelmaking component, ultimately driving Peabody into bankruptcy.

Australian Plans

Kellow still considers Peabody's Australian metallurgical and thermal coal operations as core. But the company recently shut down its high-cost Burton mine and is looking to phase out some other facilities over the next five years, he said. He believes the company can close out its sale of its Metropolitan metallurgical coal mine to South32 Ltd., a deal currently under review by Australian regulators.

“I can't talk for the industry, but Peabody will be a very competitive producer in the most competitive markets based on the quality of our mines, the quality of our assets and the quality of our people,” Kellow said. 

That won't necessarily mean more production.

“Our planning," Kellow added, "is more about quality of cash flows, quality of assets, than it is necessarily about tons.''

--With assistance from Vonnie Quinn

To contact the reporter on this story: Tim Loh in New York at tloh16@bloomberg.net.

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Jim Efstathiou Jr., Stephen Cunningham