Cloud Peak Energy Inc (NYSE: CLD), Traders News Analyst

Company overview


Cloud Peak Energy Inc. (NYSE: CLD), headquartered in Wyoming, is one of the largest coal producers in the USA and the only pure play Powder River Basin coal company. It is one of the safest coal producers in the country and mines low sulphur, subbituminous coal and provides logistics supply services. It owns and operates three surface coal mines in the Powder River Basin, which is the lowest cost coal producing region in the country. The Antelope and Cordero Rojo mines are located in Wyoming and the Spring Creek Mine in Montana. In 2015, the company shipped approximately 75 million tons from its three mines to customers located in the US and the rest of the world… It also owns rights to substantial undeveloped coal and complimentary surface assets in the Northern Powder River Basin, establishing its long-term competitive position to serve Asian export and domestic customers. With approximately 1,500 employees, it is widely recognized for its outstanding performance in its safety and environmental programs and is a sustainable fuel supplier for around 3% of the nation’s electricity.


Financial results first quarter of FY 2016.


Among the highlights of the results were adjusted EBITDA for the quarter of ($ 1.3 million) compared to $ 39.4 million for the first quarter of the previous year. Shipments for the quarter declined from 19.7 million tonnes in the previous year to 13 million tonnes. Cost per tonne was $ 11.15 for the quarter compared to $ 10.02 in the previous year. Cash margin was $ 1.50 per tonne compared to $ 3.03 per tonne in the first quarter of the previous year. The average liquidity was $ 557.7 million including cash and cash equivalents of $ 79.4 million as of the end of the quarter.


In the first quarter of 2016, the company received approval from the Wyoming Department of Environmental Quality to continue self bonding $ 90 million of reclamation obligations within the state for the Antelope mine and, in the second quarter, the self bonding renewal of $ 100 million was approved for the Cordero Rojo mine.


Pres and Chief Executive Officer Colin Marshall said that unfortunately, just when the company did not need it; it is experienced one of the mildest winters on record. As a result, coal shipments were down 34% because utility customers who had full stockpiles used lower-priced natural gas and reduced shipments to well below their contract rates. The company did well to control costs during the quarter, which is an achievement in a high fixed cost business. The second quarter is also expected to be slow, but shipments are expected to pick up considerably in the second half of the year because of the increase in summer cooling demand.


During the quarter, there were no reportable injuries at the company’s operations, resulting in the year-to-date Mine Safety and Health Administration (MSHA) all injury frequency rate of zero. It is now more than six months since the last reportable injury and this remarkable achievement demonstrates a quality of the workforce and the ability to focus on safety, especially during very unsettling times for the industry as a whole. In the course of 121 MSHA inspector days at the mining sites during the quarter, the company received five significant and substantial citations of which four have been assessed for fines totalling $ 2282.


Review of business


The end of the last year saw high customer coal stockpiles because of the mild start to winter, which resulted in reduced heating and electricity demand. Low heating demand also reduced natural gas prices significantly allowing gas to replace coal. During the last quarter of 2015, customers generally took their 2015 contracted coal leading to the rapid buildup of stockpiles. The continuation of the mild winter in the first quarter of 2016 led to greatly reduced shipments as utilities took advantage of sub $2/ MMBtu natural gas in a quarter when U.S. electricity demand was down 5% and energy used in heating was down 34% from the first quarter of 2015. MSHA indicates that U.S. coal production of 172 million tons for the first quarter of 2016 is down nearly 28%, or 67 million tons, compared to the first quarter of 2015. Revenue from the Owned and Operated Mines segment decreased in the first quarter of 2016 compared to the first quarter of 2015 due to shipments declining 34% and lower average realized prices per ton sold.


Cost per ton increased by 11% to $11.15 for the first quarter of 2016 as a result of fewer tons shipped. Total cost of product sold decreased 27% in the first quarter of 2016 as compared to the same period in 2015. There were large decreases in production taxes and royalties in line with reduced revenues. Diesel and repair and maintenance costs decreased as a result of reduced equipment hours and material moved. The company is implementing a wide range of cost management measures to reduce costs as production declines. Including cutting overtime, reducing the use of contractors, reducing retiree medical benefits, reducing scheduled work hours, early retirement incentives, and not filling vacant positions.


Domestic and international outlook


Shipments in the second quarter of 2016 will continue to be slow in the domestic market because of the reduced demand between winter and summer percent. Shipments should pick up significantly in the second half of the year and the rapid decline rate of many oil and natural gas fields should see a reduction in natural gas production. Demand and pricing for coal transported by sea in the international markets continues to be weak because of the impact of reduced imports from China and the strong US dollar. Imports from China and India seem to have stabilised, which could help balance the reduction in Indonesian exports… The strong US dollar has improved economics for coal producers in Indonesia and Australia, but there are unlikely to be new investments in production capacity at the current price levels.


The bottom line


Despite a creditable performance by the company, future uncertainties about the coal industry as a whole preclude any further investment at the moment. We would rate the stock as a Hold.


I’m a Chartered Accountant by qualification and have extensive experience in the financial services industry. I have held senior positions in the HSBC group and have also been a consultant to ANZ Grindlays Bank and the Thomas Cook Group. I have written thousands of articles and received more than 60 five star reviews for my work.

You will find a number of my articles on Seeking Alpha and Capital Cube.

TNS Contributor Info

Ramuskrishnan Iyer

Author’s Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in the article.

Source: Traders News Source