 | |
- close
- close
|
|
Topic
Top news source/blog that we're missing
Why do you recommend this news source?
|
||
WIKI ANALYSIS
Patriot Coal (PCX) is the third largest coal producer in the eastern United States.[1] Because coal is expensive to transport (in some cases, transportation costs can account for up to 70% the cost of delivered coal),[2] most coal is mined near where it is used - usually to power electricity plants and make steel. Therefore, to cater to the eastern U.S. market, Patriot Coal has operations in the eastern U.S., namely Central Appalachia, Northern Appalachia, and the Illinois Basin.
With energy prices skyrocketing, the price of coal has jumped by 160% between July 2007 and July 2008, giving Patriot Coal a big boost.[3] As a result, in Q2 2008, Patriot sold 5.9 million tons of coal on a revenue of $343 million, versus 5.3 million tons on a revenue of $264 million in Q2 2007. Although coal is less expensive than other energy sources, it also creates more pollution, and environmental repercussions of coal are a significant concern, especially with the advent of new, clean, and cheap energy sources, such as solar power and wind energy. The advent of legislation such as the cap-and-trade system suggests that governments are pushing for cleaner sources of energy, such as natural gas and renewables.
Company Overview
Patriot Coal produces coal for electricity generation (77% of its production) and metallurgical quality coal for steel manufacturing (23% of its production). As of December 31, 2007, Patriot Coal controlled around 1.3 billion tons of proven coal reserves, making it the third largest producer and marketer of coal in the eastern United States.[4]
The type of coal used in steel-making is referred to as metallurgical-quality coal and is distinguished by its high carbon content as well as various other chemical attributes. Metallurgical-quality coal is generally higher in heat content (as measured in Btus), and is better for both electricity generation and steel production, making it more expensive.[5]
| Patriot Coal[6] | 2005 | 2006 | 2007 |
| Revenue (Millions of Dollars) | $978.277 | $1.148 | $1.073 |
| Total Tons Sold (Thousands) | 23,785 | 24,290 | 22,143 |
| Average Price Per Ton (Appalachia/Illinois Basin) | $52.80/$24.23 | $58.21/$28.64 | $56.89/$32.71 |
The decrease in the Appalachia revenue for 2007 compared to revenue for 2006 reflected lower sales volumes driven by unexpected delays in coal mining procedures and the loss of a coal supplier in late 2006. The decrease in the Illinois Basin revenue for 2007 compared to revenue for 2006 reflected lower sales volumes associated mainly with the closure of the Big Run mine.[7] Per ton prices are set by individual contracts; the discrepancy in pricing between coal sold in the Appalachia region versus coal sold in the Illinois Basin can likely be attributed to the time of contract signing (coal was much cheaper a year ago than it is now) and the quantity of coal agreed to be sold in the contract (much more coal is sold in Appalachia, resulting in a lower price-per-ton agreement, than in the Illinois Basin).[8]
Business Segments
Patriot's mining and coal operations are divided into two regions: Appalachia and the Illinois Basin:
- Appalachia (76% of sales, 65.2% of income): In southern West Virginia, Patriot Coal has five company-operated mines and many contractor-operated mines, all of which are handled by four coal preparation plants. In northern West Virginia, Patriot has one company-operated mine, handled by one preparation plant. In 2007, Patriot sold 14.4 million tons of coal in Appalachia. As of December 31, 2007, Patriot controlled 586 million tons of proven coal reserves in Appalachia. Appalachia's mining operations are located at the Big Mountain mine, the Rocklick mine, the Wells mine, the Kanawha Eagle mine, and a Federal mine.[9]
- Illinois Basin (24% of sales, 34.8% of income): In the Illinois Basin, Patriot Coal has four company-operated mines handled by three preparation plants. In 2007, Patriot 7.7 million tons of coal in the Illinois Basin. As of December 31, 2007, Patriot controlled 676 million tons of proven coal reserves in the Illinois Basin. The Illinois Basin's mining operations are located at the Highland mine, the Bluegrass mine, the Dodge Hill mine, and the Big Run mine.[10]
While 2007 presented a losing year for Patriot, with a total net loss of -$106.87 million, these losses are largely due to the Peabody spin-off, lower sales volume, and higher operating costs. [15] However, the first two quarters of 2008 have been better than the corresponding quarters of 2007 as Patriot continually aims to cut costs and boost production. While revenues improved from Q1 2007 to Q1 2008, Patriot sold 5.1 million tons of coal in Q1 2008 versus 5.7 million tons in Q1 2007. Therefore, the increase in revenue can be attributed to better margins and increasing coal prices. In Q2 2008, Patriot sold 5.9 million tons of coal on a revenue of $343 million, versus 5.3 million tons on a revenue of $264 million in Q2 2007. Increasing margins coupled with increasing sales translate into future earnings growth. Demand for coal is projected to increase through 2009.[16][17]
Magnum Coal Acquisition
In July 2008, Patriot Coal announced the completion of its acquisition of the Magnum Coal Company at a total price of about $695 million. Magnum Coal was the most favorable acquisition target for the following reasons:
- Magnum Coal is the third largest coal producer in Boone County (Patriot is the second largest)
- Magnum Coal is the largest in Kanawha County (Patriot is the third largest).
- Magnum Coal has been owned by Arclight Capital since 2005. Arclight wanted to take the company public in 2006 but was unable to because of the weaker coal market.
The acquisition broadens Patriot's asset base and increases the company's surface mining capabilities. It is projected that Magnum's high-margin metallurgical coal production will raise Patriot's total metallurgical coal production to 7 to 8 million tons for 2008, from what would have been 4.8 to 5 billion tons produced without the acquisition.[18] Additionally, many Patriot-owned properties are contiguous to Magnum-owned properties, which creates synergistic opportunities for a smooth acquisition and assimilation of Magnum's resources.[19]
About coal as an energy source
Coal is the most abundant fossil fuel produced in the United States. The United States has the world's largest known coal reserves (about 263.8 billion tons). This is enough coal to last approximately 225 years at today's level of use. However, coal is a nonrenewable energy source that takes millions of years to create. Between 1990 and 2006 coal consumption in the U.S. increased 23% to 1.1 billion tons. Analysts project that U.S. utilities will increase consumption by an additional 39% by 2030. Globally, coal consumption increased 30% in the past five years alone, and it is projected to increase another 1.1 billion tons over the next 10 years.[20] The average price per ton that Patriot Coal received in the Appalachian region increased from $52.80 in 2005 to $58.21 2006 and in the Illinois Basin from $24.23 in 2005 to $32.71 in 2007[21], following the increasing worldwide demand for coal.
Coal is a highly cost-efficient source of energy. When burned to produce electricity, coal-powered plants tend to have an average efficiency of 33% energy-to-electricity output. About 92 percent of the coal used in the United States is for generating electricity. However, coal can also be used for various industry applications, for making steel, and for export (more than half of exported coal is used for making steel). Patriot Coal distributes coal for generating electricity as well as metallurgical-quality coal for steelmaking purposes.[22]
Key Trends and Forces
Price fluctuations of competing fuels drive demand for coal
One of coal's competitors is natural gas. US natural gas prices have more than doubled from $3/thousand cft to $8.4/thousand cft between Jan 2002 and July 2008.[24] The average price paid by electricity generators for natural gas in March 2008 was $9.29 per MMBtu, a 24.9% increase from the March 2007 price of $7.44 per MMBtu. In comparison, the average price paid by electricity generators for coal in March 2008 was $1.94 per MMBtu, up 9.6% from the March 2007 price.[25] Since coal is cheaper and its price has increased less than that of natural gas, coal continues to lead the market for electricity generation. If the price of natural gas falls sharply, demand for coal is likely to drop and demand for natural gas will increase.
However, natural gas is a cleaner burning alternative to coal, and contributed 19% to annual US electricity production.[26] Natural gas is therefore increasingly gaining market share over coal. While the adjacent figure indicates that coal still contributes the most to US electricity generation, consumption of coal for power generation in March 2008 was up by 1.0% compared to March 2007. For the same time period, consumption of natural gas increased by 3.0%.[27] Year to date, consumption for coal has increased by 1.8%, while consumption for natural gas has increased by 3.7%. [28]
Commodity cycles make consistency difficult for Patriot Coal
Coal is a commodity and is therefore subject to commodity cycles driven by the forces of supply and demand. In times of excess supply, coal prices fall, and in times of rising demand, coal prices rise. Presently, demand for energy is soaring, especially in developing nations like China and India that harbor massive populations. This causes global coal prices to rise. While Patriot Coal does not export coal overseas In times of commodity booms, coal companies achieve increased profit margins as revenues soar in proportion to coal prices. However, in times of commodity busts, coal companies suffer lower net profits. Since there is not much product discrimination in the commodity market, Patriot Coal's coal is virtually indistinguishable from its competitors' coal; coal companies are therefore price competitors that must lower prices to achieve a competitive advantage. Patriot Coal is therefore vulnerable to price cycles; Patriot has no control over the price of coal, which is subject to greater market forces. From July 2007 to July 2008, commodity prices have soared; the price of coal has jumped by 160% in this time period.[29] This translates into record revenues for Patriot Coal; in Q2 2008, Patriot Coal earned revenues of $343 million for selling 5.9 million tons of coal versus earning $264 million for selling 5.3 million tons of coal in Q2 2007.[30] The dramatic increase in revenue for a relatively smaller increase of 600,000 tons of coal sold is reflective of the skyrocketing price of coal.
Environmental concerns and regulatory legislation hinder Patriot Coal as incentive for renewable energy grows
The adjacent figure indicates that coal is one of the dirtiest forms of energy production. Coal produces nearly 1200 kilotons of CO2 per terawatt of electricity produced. Other cleaner forms of energy, such as natural gas, wind energy, solar power, and hydroelectric power produce much less CO2 but also cost much more than coal. However, legislation has been passed to subsidize renewable energy sources while capping on CO2 emission by establishing incentives such as carbon trading. The Clean Air Act[32] and the Carbon Principles (set by Citigroup, JP Morgan, and Morgan Stanley)[33] are two examples of legislation and policies that seek to discourage dependence on coal as an energy source that have increased costs for coal producers such as Patriot Coal.
The Renewable Portfolios Standard (RPS), a regulatory policy requiring US states to increase the production and use of renewable energy sources, is likely to pose a future threat to Patriot Coal's revenues as states increase their percentages of cleaner energy. For example, Pennsylvania has planned to obtain 18% of its energy from clean sources by 2020, and Illinois has planned to obtain 25% by 2025.[34] Currently, there are 27 states and the District of Columbia that have RPS policies in place, and this number is likely to grow.[35] As legislative measures increase pressure on coal production, Patriot Coal's profits are likely to decrease.
PCX produces all its coal very close to its customers
A significant issue most coal companies face is transportation costs. Coal is expensive to transport (in some cases, transportation costs can account for up to 70% the cost of delivered coal), [36]. Since Patriot Coal only supplies coal for electricity generation to US power plants, international transportation is not an issue the company faces (while other coal companies, such as Peabody Peabody Energy (BTU), which has operations in Australia, face high coal transportation costs). Additionally, all of Patriot Coal's reserves are located within a 500 mile radius of the majority of electricity-generating power plants and steel producers in the United States. [37] By being in close proximity to buyers of coal, Patriot minimizes its transportation costs, thereby increasing potential profit margins.
Competition
As a small, newly spun-off company, Patriot Coal faces competition from other small US coal producers that operate in similar regions and have comparable market caps. Two such companies that represent Patriot's most direct competitors include International Coal Group (ICO) and James River Coal Company (JRCC).[38] Since coal is a commodity good, there is no real product differentiation between competitors, resulting in coal companies engaging in price competition. This leads to competitive price cycles and, as a result, relatively low profit margins.[39]
| Company | Tons of Coal Sold (millions) | Price Per Ton | Net Company Profit (millions) | Market Cap (billions) |
|---|---|---|---|---|
| Patriot Coal [40] | 22.143 | $48.47 | -$106.87 | 4.31 |
| International Coal Group (ICO) [41] | 18.3 | $42.01 | $-126.14 | 2.08 |
| James River Coal Company (JRCC) [42] | 11.2 | $42.63 | $-68.84 | 1.57 |
As of December 31, 2007, Patriot Coal controlled around 1.3 billion tons of proven coal reserves that it has not yet mined and sold, indicating its growth potential.[43] One advantage Patriot Coal has over its competitors is that it produces a significant amount of metallurgical-quality coal (23% of total coal production) for making steel, while its competitors produce little or no metallurgical-quality coal.[44] The James River Coal Company (JRCC) produces no metallurgical-quality coal, and only 2.2% of coal produced by the International Coal Group (ICO) is of metallurgical quality; the other 97.8% is used for electricity production.[45] Metallurgical coal, which is of a higher quality than coal used for electricity-generation, is sold at a higher premium due to its importance in the steel-making process.
References
- ↑ Patriot Coal Declares 2-For-1 Stock Split and Expands Board
- ↑ World Coal Institute: Coal Transportation
- ↑ Energy Information Administration - Coal
- ↑ Patriot Coal Declares 2-For-1 Stock Split and Expands Board
- ↑ ICO 10K, Page 4
- ↑ [Patriot Coal 2007 Annual Report
- ↑ Patriot Coal 2007 Annual Report
- ↑ Patriot Coal 10K, Page 49
- ↑ Patriot Coal 2007 Annual Report
- ↑ Patriot Coal 2007 Annual Report
- ↑ Patriot Coal 10K, Item 1, Page 5
- ↑ Patriot Coal 10K, Item 1, Page 5
- ↑ Patriot Coal Q2 Earnings Call Transcript
- ↑ Patriot Coal Q1 Earnings Call Transcript
- ↑ Patriot Coal 2007 Annual Report
- ↑ Patriot Coal Q2 Earnings Call Transcript
- ↑ Patriot Coal Q1 Earnings Call Transcript
- ↑ Patriot Coal Q2 Earnings Call Transcript
- ↑ MarketWatch - Patriot Coal Acquisition of Magnum Coal
- ↑ Energy Information Administration - Coal
- ↑ Patriot Coal 2007 Annual Report
- ↑ Energy Information Administration - Coal
- ↑ EIA Electric Power Monthly Report
- ↑ Bloomberg Commodities Futures
- ↑ EIA Electric Power Monthly Report
- ↑ Foundation Coal Annual Report
- ↑ EIA Electric Power Monthly Report
- ↑ EIA Electric Power Monthly Report
- ↑ Energy Information Administration - Coal
- ↑ Patriot Coal Q2 Earnings Call Transcript
- ↑ IEA, Hydro-Power report
- ↑ Clean Air Act
- ↑ Environmental Leader - Article
- ↑ EERE State Activities
- ↑ EERE State Activities
- ↑ World Coal Institute: Coal Transportation
- ↑ Peabody-Patriot Form 10, page 1
- ↑ Patriot Coal 10K, Page 37
- ↑ [ICO Competition Report]
- ↑ Patriot Coal 10K, Item 7, Page 44
- ↑ ICO 2007 10-K, Page 66
- ↑ JRCC 2007 10K, Page 37
- ↑ Patriot Coal 10K, Item 1, Page 4
- ↑ Patriot Coal 10K, Item 1, Page 6
- ↑ ICO 10K, Page 2
| ||||||
|
|
