The Latest Casualty in Energy’s Hardest Hit Industry
Another coal company bites the dust. Again.
Patriot Coal, a miner of coal in several Appalachian states, filed for Chapter 11 bankruptcy on May 12. Patriot said it is “in active negotiations for the sale of substantially all of the Company’s operating assets to a strategic partner.”
The move comes just a year and a half after the company emerged from its previous bankruptcy. At the time, some secured creditors received repayments, but shareholders bore the brunt of the restructuring.
The initial bankruptcy came as Patriot struggled with high costs during a downturn in the coal industry. But after the company came up with a restructuring plan that included a cut in labor costs and the closure of high-cost mines, Patriot thought it would rebound. But it wasn’t to be. As Taylor Kuykendall of SNL Energy notes, “Patriot was plagued by a union strike, infrastructure failures, fatal accidents and persistently weak coal markets that ultimately resulted in the company again filing for Chapter 11 bankruptcy reorganization.”
In one sense, the problems at Patriot Coal were unique to the company. It was originally a spin off from Peabody Energy, which unloaded healthcare liabilities onto the newfound Patriot Coal. That weighed down the company from the start, freeing Peabody from the costs. SNL’s Kuykendall chronicles a series of mishaps in 2014, from lawsuits for environmental damages to a series of safety accidents. Patriot’s CEO called it “one of the worst years in Patriot’s recent history.”
The poor performance affected output. In the first three months of this year, Patriot produced 4.1 million tons of coal, a 15.1% decline from the first quarter in 2014.
At the same time, Patriot’s woes are indicative of the wider malaise in the coal industry. Several years ago, mining companies around the world made large-scale investments in new mining capacity. Much of that came online all at once. The resulting oversupply situation crashed coal prices. Australia in particular, has contributed to a massive increase in coal capacity. A glut in supply contributed to Patriot’s original bankruptcy. But the problem has not gone away. Coal markets are expected to remain oversupplied throughout this year.
The buildup in supply came at the same time that the U.S. was undergoing an historic transition. Coal, which dominated the electric power market for a century, started to lose market share to cheap natural gas. Between 2007 and 2013, coal’s share of the electricity market declined from about half to just 39%. That too shows no signs of changing. More utilities are closing coal-fired power plants and instead opting for natural gas or renewable energy. Stiff regulations from the EPA are only compounding the problem for coal. An estimated 13 gigawatts of coal-fired capacity are expected to be retired in 2015.
But coal executives thought they could survive the disappearance of coal from the United States. By exporting to China, which at one point was erecting a handful of coal plants every single week, coal producers could shift their customer base, focusing on demand from developing countries. China’s voracious appetite for coal extended to coking coal, used for steelmaking.
However, China’s slowing economy coupled with its concerted efforts to keep air pollution in check led to a 1% to 2% decline in coal consumption in 2014, a development that few thought possible.
As a result, Patriot is not the only casualty of depressed coal markets. Xinergy, a Tennessee coal producer, filed for bankruptcy last month. According to the Wall Street Journal, Walter Energy Inc., another coal miner in Alabama, is discussing its options with creditors. Bankruptcy rumors are starting to swirl in the markets as investors sold off Walter’s stock.
Larger producers have not been spared either. Arch Coal has seen its share price crash from over $4 per share in 2014 down to just 88 cents this month. The trajectory of Alpha Natural Resources’ stock looks similar. Peabody’s has fallen from $19 to just $4.55 per share over the past 12 months.
In other words, while Patriot Coal had some unique problems, its downfall is illustrative of what the entire sector is dealing with. Coal has fallen on hard times.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.