St. Louis-headquartered Peabody Energy (NYSE:BTU) is a well-known business in a “dirty” energy industry. For direct exposure to the U.S. coal market, BTU stock is highly liquid, easy available and reasonably affordable.
Peabody has been getting coal out of the ground since the company’s founding in 1883. Today, it’s the biggest U.S. coal producer.
Can an old company like Peabody Energy try something new? As we’ll discover, it’s entirely possible as Peabody’s still chiefly a coal miner but is venturing into a more eco-friendly energy niche.
That’s all fine and good, but not all of the news surrounding Peabody Energy is entirely positive. As it turns out, the company seems to have more debt than it can handle – though thankfully, a big bank might be willing to lend a helping hand.
A Closer Look at BTU Stock
If we can set coal aside for a moment and try out some technical analysis, BTU stock appears to be in the midst of a huge comeback.
This is, without a doubt, related to the recent broad-market surge in energy stocks. As the old saying goes, a rising tide lifts all boats.
BTU stock, believe it or not, traded at $46 back in the summer of 2018. The shareholders got slammed during the next couple of years, though, as the stock cratered to $1 in late 2020.
With commodity prices soaring in 2022, a major comeback seems to be in progress. Peabody Energy shares cost more than $22 apiece not long ago, though the stock is definitely volatile and subject to rapid price changes.
Now, here’s something you might have have expected. Peabody Energy has a trailing 12-month price-to-earnings ratio of 6.86.
In other words, BTU stock could be considered a bargain when we take the company’s earnings into consideration. So, just maybe, there’s a screaming buy here for risk-tolerant investors.
‘M’ Is for Margin Call
If you’re a stock trader, the words “margin call” might strike fear into your soul. Those two words mean that you owe money, and brokers typically won’t hesitate to collect on that debt.
Big businesses can get margin-called, as well. As Bloomberg recently reported, Peabody Energy recently got a margin call on coal, to the tune of $534 million.
Apparently, a year ago the company locked in a price to sell coal at $84 per metric ton. That wager went awry for Peabody as the coal price recently shot up to $425 per per metric ton.
The situation could get worse for Peabody Energy before it gets better. Steve Hulton, senior vice president for coal markets at Rystad Energy in Sydney, anticipates that coal prices could reach $500 per ton this year, so Peabody could end up owing even more money.
Some Good News, Maybe
In order to help pay this debt, Peabody Energy has arranged a $150 million credit line with Goldman Sachs (NYSE:GS).
That’s good news, sort of. It gives Peabody some breathing room for a while, but the company will have to pay a hefty 10% interest rate on that loan.
Perhaps this development will provide some optimism, or at least some curiosity. As Bloomberg reports, Peabody Energy is embarking on a joint venture with Riverstone Credit Parters and Summit Partners Credit Advisors to “develop utility-scale solar projects on land around retired coal mines.”
This joint venture will be called R3 Renewables, and it will initially focus on six sites in Illinois and Indiana. It’s an ambitious project: over the next five years, R3 Renewables is expected to develop over 3.3 gigawatts of solar projects and 1.6 gigawatts of battery storage.
Whether this represents a meaningful transition to solar projects is up for debate. For his part, Bloomberg Intelligence analyst Andrew Cosgrove doesn’t seem entirely convinced; “This doesn’t move the needle, financially,” he commented.
The Bottom Line
In the short term, BTU stock’s trajectory will likely depend on moves in commodity prices.
Long-term, the fiscal picture is murky. It’s hard to imagine that Peabody Energy will pivot meaningfully from coal, and the company’s debt-related problems are likely to persist.
In the final analysis, it’s fine to have fun trading BTU stock to capture gains in coal’s price swings. As a cautious investor for the long haul, however, it may be difficult mine profits from Peabody Energy.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.