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Why Analysts Expect Peabody Energy’s Revenues to Decline in 2Q16

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Jul. 22 2016, Updated 12:04 p.m. ET

Peabody Energy’s revenue estimates

Peabody Energy (BTUUQ) reported about $1.3 billion as consolidated revenue for 2Q15. Analysts estimate that Peabody Energy will report about $1.1 billion in 2Q16 revenues, which is almost a 19% decline on a year-over-year basis. However, estimated revenues are about 5% higher compared to 1Q16 revenues.

Estimated 2Q16 revenues are less than the last five years’ second-quarter revenue values.

Most of the thermal coal produced in the United States is consumed in power generation. Power generation varies with seasonal demand. So it’s reasonable to compare year-over-year revenue data to account for seasonal variations rather than make a quarter-over-quarter comparison.

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Coal production

According to the EIA’s (U.S. Energy Information Administration) weekly coal production data, coal production in all major US coal-producing (KOL) regions recovered in 2Q16 from their first quarter lows.

This consistent increase in weekly coal production may imply higher volumes for BTUUQ and peers Alliance Resource Partners (ARLP), Arch Coal (ACIIQ), Alpha Natural Resources (ANRZQ), and Cloud Peak Energy (CLD).

The majority of Peabody’s shipments comes from its mines in the Western region. According to EIA data, coal production increased nearly 27% in the Western region, nearly 15% in the Appalachian region, and nearly 9% in the Interior region since the beginning of 2Q16. Current production levels are on par with 1Q16 production levels.

According to the World Steel Association, Asian crude steel production marginally increased from 94.4 million tons in May 2015 to 95.6 million tons in May 2016. This could have a positive impact on Peabody’s Australian metallurgical coal shipments in 2Q16.

Coal prices

According to the EIA’s average weekly coal spot prices, coal prices for the Northern Appalachian region fell the most in 2Q16. Coal spot prices for the Central Appalachian region decreased from their peak value of $43.63 per short ton in 1Q16 to a low of $39.50 in 2Q16.

The Northern Appalachian region’s coal prices declined from their peak value of $48.60 per short ton in 1Q16 to a low of $42.10 in 2Q16. Powder River Basin coal prices fell from their peak value of $9.70 per short ton in 1Q16 to a low of $8.80 in 2Q16. The Illinois Basin’s coal prices remained nearly flat at around $32 per short ton.

Lower spot prices will lead to lower price realization on spot sales. This could lead BTUUQ’s customers to defer their shipments, which could result in lower revenues, according to analysts’ estimates.

Next, let’s look at Peabody Energy’s margin estimates.

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