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MEE AT A GLANCE

P/E ► 19.5 AVG EV/EBITDA ► 9.49 AVG ROA ► 6.1% AVG ROE ► 11.8% AVG Debt to Equity ► 2.10 AVG Current Ratio ► 2.98 AVG Interest Coverage Ratio ► 2.76 AVG

 

 

 

 

 

 

Massey Energy Company (MEE) is America's 4th largest coal producer by revenue. Operating in the Central Appalachia region, which includes West Virginia, Virginia, and Kentucky, MEE mines, processes, and sells low-sulfur, high-quality coal for a variety of industrial uses, including electricity generation and steel making.

MEE employs over 5,400 persons, owns 2.3 billion tons of coal reserves, and has 68 million raw coal tons of annual processing capacity, making it the largest coal producer in Central Appalachia by a wide margin. As an energy provider, and specifically a provider of nonrenewable energy, Massey is very sensitive to the world's demand for energy, and the growing global trend toward cleaner energy sources.

Company Overview

Massey Energy Company mines, produces, and markets bituminous coal from the Central Appalachia region in the Eastern United States. Massey sells two main types of coal: steam coal, which is used by utility companies to generate electricity; and metallurgical coal, which is used to produce coke, a key component in steel production. MEE sells the highest-valued steam coal in the United States, and Massey's metallurgical coal is exported around the world due to its high quality and environmental friendliness (low sulfur content).

MEE's revenue trend is generally upward, but the operating income is more variable, as shown below. Massey's losses in 2002 and 2003 were caused by a combination of weak demand caused by a flagging economy and higher production costs per ton of coal mined as the result of decreased production. A significant refinancing was undertaken in 2003, which helped MEE reorganize its debt structure and increase its cash position to increase asset liquidity. As the economy began to recover in 2004, MEE profited from the increase in coal demand.

The company saw negative operating income again in 2005, due primarily to higher costs of administration and executive compensation. Significant spending on capital restructuring and development of the mining infrastructure in the Central Appalachia region was also a factor in the operating loss.

Since 2003, the volume of coal sold has generally decreased. However, revenues have increased due to a significant increase in the profits per ton of coal sold. This increase in profit margin was due to higher prices for coal, caused jointly by a supply shortage of coal and increased demand for coal as a result of higher oil and natural gas prices and general economic growth.

Trends and Forces

Rising Oil Prices Increase the Demand for Coal

Coal is an important source of energy, providing 40% of the electricity generated in the U.S., more than oil and gas combined.

In many situations, coal is a viable substitute for oil as a source of energy. Oil prices have been rising in recent years, as the supply from oil-producing regions such as the Middle East has been restricted. Even with the frenzy of oil exploration and production in the U.S. recently, Central Appalachia's coal reserves still represent the energy content equivalent of all proved oil reserves in the United States. Massey controls 1/3 of the reserves in Central Appalachia, and stands to profit from the rising oil prices, which will push up demand for coal.

Natural Resource Scarcity Benefits Suppliers With Proven Reserves

On the supply side, coal companies increased production in 2006 in response to higher profit opportunities and higher prices per ton of coal sold. This production increase, combined with stockpiles of coal held by major power plants, created a large increase in coal supply, which created temporary downward pressure on coal prices for 2006, but was not strong enough to overcome the effect of increasing demand on coal prices.

Looking forward, nonrenewable resources scarcity of nonrenewable resources increases. As the largest producer in the Central Appalachia region, with 2.2 billion tons in reserves, Massey may be the only firm in the region with the reserves to continue operations for the next decade without needing to move into higher-cost reserves or pursuing acquisitions. The growing scarcity of new reserves benefits companies such as MEE that have the potential to continue supplying in the future.

Coal prices have trended upwards since 2003, with the largest increases in metallurgical coal.

"Clean Coal" Movement Indicative of Trend Towards Low-Sulfur Coal

As the threat of global climate change looms, nations and private companies have sought ways to minimize greenhouse gas emissions. One solution has been to use coal that emits less sulfur, an environmental hazard, into the environment. The so-called Clean Coal Movement has spearheaded a trend towards increased demand for high-quality, low-sulfur coal, such as that produced by Massey, for both industrial and metallurgical uses.

Growing Needs of Developing Economies Are Boosting Worldwide Energy Demand

With the rise of rapidly-developing economies such as those of India and China, the global demand for energy has been rising rapidly. Rising global demand for energy positively affects Massey, as demand growth has outstripped increases in supply, leading to shortages of energy sources and higher profit margins for energy companies. China and other areas of Asia have significantly increased their demand for coal specifically, demanding more coal than other sources of energy because coal is generally lower in cost, although it can be less clean. Furthermore, as oil supply diminishes, more companies around the world will turn to coal for their energy needs, which will give Massey a larger potential market.

Estimated CO2 emissions per Terawatt of various electricity sources -- coal, even clean (bituminous) coal, is among the dirtiest of power sources

Regulations Favoring Renewable Energy May Harm Suppliers of Nonrenewable Fossil Fuels

The global eco-friendly trend has spawned legislation in many countries in favor of renewable energy. For example, the U.S. enacted the Energy Policy Act of 1992, which introduced the Production Tax Credit (PTC) to independent power producers. This hurts nonrenewable energy companies such as Massey, which must compete with the government-subsidized renewable energy forms. However, Massey's low costs of production, relative to its coal-producing competitors, means that Massey will suffer less than competitors, and the regulations may end up helping Massey by eliminating its competing coal producers.

Competition

Massey was the fourth largest U.S. coal company in terms of revenue in 2006, behind Peabody Energy (BTU), Arch Coal (ACI), and CONSOL Energy (CNX).

• Peabody is a coal company that operates mines across the United States and Australia, and the U.S.'s largest coal produce by a wide margin. Peabody has recently announced plans to shut down its operations in the Appalachian area in order to focus more on its business in other regions.
• Arch Coal is the second-largest coal producer in the United States. Operating in the Powder River Basin as part of an oligopoly, with limited competition, Arch has very low costs and can maintain high profit margins.
• CONSOL produces multi-fuel energy, primarily for electric power generation in the United States, as well providing metallurgical coal to metal and coke producers. The company also produces and sells methane gas primarily to gas wholesalers.

MEE also competes with a wide variety of coal producers located outside of the U.S., notably companies in Australia, Canada, Columbia, Russia and Venezuela.

Massey is the largest producer in Central Appalachia by a wide margin, producing about 35% of the region’s production in 2005 and approximately twice as much as the nearest competitor.

Notes

1. ↑ BTU 2007 10-K, Item 5, Page 50
2. ↑ ACI 2007 10-K
3. ↑ Massey Energy 2007 10-K
4. ↑ Consol 2007 10-K