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Glencore’s Energy Segment: How Did It Place Given the Low Prices?

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Oct. 23 2015, Updated 1:06 p.m. ET

Glencore’s energy segment

Previously, we’ve seen that Glencore’s (GLNCY) energy products segment is the biggest contributor to the company’s revenues. The company produces both crude oil and coal. In this part of the series, we’ll see how Glencore’s energy segment placed given the low price environment.

Glencore’s energy products segment generated an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $1.65 billion in 1H15. The company’s industrial activities accounted for ~70% of this while the remaining was attributable to marketing activities.

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Coal segment

Glencore’s energy products segment is mainly engaged in coal production. Coal accounted for more than 94% of the segment’s 1H15 industrial revenues. Moreover, coal accounted for the bulk of energy products segment’s 1H15 adjusted EBITDA.

Glencore’s energy segment’s earnings didn’t fall as much compared with those of other companies in the energy sector (XLE). In the last year, crude oil prices have fallen more than coal prices. Freeport-McMoRan (FCX), which also produces crude oil and natural gas, has been under pressure as crude oil prices have tanked. However, Freeport is now looking at strategic alternatives for its energy business. You can read more about Freeport-McMoRan in our series Freeport-McMoRan: Why the Current Rally Could be Unsustainable.

Over the long term, thermal coal’s fundamentals don’t look great considering the fact that most countries are looking at alternate sources of electricity production. Coking coal demand could also be subdued as China’s steel production slows down. Steel companies including ArcelorMittal (MT) and Nucor (NUE) have also been negatively impacted by the slowdown in China’s demand for steel.

Glencore is also into the agricultural products business. We’ll discuss more on this in the next part of this series.

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