COAL IS NOT DEAD: Run for First Place

COAL IS KING, LNG SEARCHES FOR A PATH

Certainly the globe has a readily available and established alternative to coal at hand, being natural gas. So goes the convention…I suppose.  But how does one distribute natural gas among long transportation lines. Apparently, as goes the evident logic, a firm can move gas through the long routes that coal has known for several decades. But natural gas has to be liquefied. Australia saw this market opportunity and pursued it.  Within 18 months ending in Q4 2011, Australia approved some 6 new liquefied natural gas (LNG) plants.  The cost is at $180 billion and prospects don’t look good.

 Overall, these high hoped projects were at the start, very high priced, and required either new infrastructure as with Australia, or very expensive reversal of existing infrastructure, as with the U.S. In Australia, when projects do come in, they are late and over their billion dollar budgets.

 For instance,  Woodside’s Pluto LNG project at $14.9 Billion (Australian dollars, or some say $40B U.S. dollars,) is projected to come on line in March, 2012. But it has so far proven to be a year delayed and $1B over budget. In fact, it appears that Woodside is looking to sell 23% of its 46% stake in the project, for a projected price of $1.5B U.S. dollars.

 Fitch recently downgraded the Australian LNG projects to negative due to them going over schedule, over budget, while also confronting high labor costs and high interest rates compared to competitors.

A major competitor is here in the U.S., and is Chenier Energy (LNG). Gas must be processed into a liquid for transport overseas. Chenier has developed many long term contracts with foreign concerns, but Chenier has a $3B debt bill.

Still, Chenier has its contracts with their 4 foundational partners. All suggest 20 year agreements, for some 16 million tons per annum (mtpa) of its Sabine Pass, Louisiana’s plant, which has a total capacity of 18 mtpa.

While Chenier has sold much of their anticipated capacity, they do own debt.  Just in December Chenier sold some $300M in equity, apparently in anticipation of a debt payment of $500M in May of 2013, while a $1.7B payment is scheduled for 2016. In 2016, Chenier expects to make their first shipments on their contracts.

Chenier’s contracts so far are with GAIL, India Ltd.; Gas Natural SDG, of Spain; BG Group Plc. of England; and most recently, Korean Gas. While Chenier is developing these contracts readily, they also plan an LNG plant in Corpus Christi, Texas.

LNG CAN LEAD, BUT COAL IS LEADING THE WORLD, AND SUPPLIES GLOBAL ENERGY DEMAND

Where hope resides for LNG to meet the globes energy needs, coal remains the current supplier of such needs. While LNG requires so much needed and expensive new infrastructure, coal has historical infrastructure, and remains cheap.  Essentially, while we wait for alternatives to coal, coal is historical and its global demand reflects the case. The International Energy Administration estimates that global coal demand will increase by 600,000 tons per day over the next five years. Emerging economies have been increasing electrical generation at untold rates.

Peabody spoke of coal demand under the pressures of the Sarbanes Oxley Act. In 2010, Peabody predicted that seaborn coal demand would increase 6 to 8% in 2011, and perhaps exceed 1B tons. True….In their Q4, 2011 report, they informed that seaborn coal rose by 6% and exceeded 1 billion tons. This was led by thermal demand with 81 gigawatts of new coal generated power plants being brought on line in 2011. This world demand in coal also reflected a 32% increase in global metallurgical coal.

Coal appears to stay very much in global demand into 2012. Peabody sees seaborn coal demand rising by 100M to 120M tons in 2012. On top of a billion tons, this could mean a strong rate of increase over 2011 results. The usual suspects account for this increase. That being China, Japan, India and Germany.  Also, in 2012, 91 gigawatts of coal electricity are expected to be put onto the grid at a demand of an expected 300M additional tons of coal/ year.

China’s GDP grew by 10% in 2010, with net coal imports of 147M tons over 2009, a 41% increase. Peabody said in this last quarterly report that in 2011, China’s coal fired power generation rose by 14% to roughly 182M tons of imports. Still, in 2011, China’s GDP grew by only 8.9%. The weakest rate of growth since Q2, 2009.

This ultimately bespeaks of economic growth. In periods of major growth, so much capacity comes on line. In the end it actually produces, and must be fueled to maintain production. At China’s growth rate, and given their coal consumption indicators, China, as with a similar Asia, including India, all such countries are poised to consume additional power, for perhaps sometime.

Peabody’s financial results show the magnitude of price in a growing and demanding market.  The table below shows Peabody’s essential financials, over the course of time.  This table shows a building on pricing and a recapture of volume.Bottom of Form

	Revenue	EBITDA	Net Income    Tons Sold		Cash	LT Debt	Total Assets	Total Net Assets
2011	7.97 bln	2.13 bln	957.8 mln	250.6 mln	799.1 mln	6.6 bln	16.733 bln			11.22 bln
2010	6.74 bln	1.82 bln	774.0 mln	244.2 mln	1.3 bln	2.7 bln	11.363 bln			6.7 bln
2009	6.01 bln	1.29 bln	448.2 mln	243.6 mln	989.0 mln	2.74 bln	9.995 bln			6.2 bln
2008	6.60 bln	1.85 bln	952.9 mln	256 mln	449.7 mln	3.14 bln	9.822 bln			6.2 bln

While Peabody shows a strengthening of 

While Peabody shows a strenthening of its balance sheet, where are companies committing themselves in this market driven by the most competitive source of energy? Peabody seems to know, look above.  2011 results in terms of debt and assets certainly reflect Peabody’s major $5.5B acquisition of Australia’s Macarthur Coal.