King coal is dead. But he just might take a swipe at his mortal enemy — natural gas — on the way down.Peabody Energy’s crash into bankruptcy, taking down the largest private-sector coal miner in the world, represents a moment for the industry (or maybe just the latest in a series of moments).
Two of them came last year, when U.S. power plants running on natural gas were used more than coal-fired plants for the first time ever and when Paris happened to host a global conference that was generally down on the whole idea of burning black rocks.
Regulation aimed at curbing coal use has undoubtedly played its part in pushing coal miners over the precipice. Yet the industry has also suffered from a combination of factors that have periodically pulverized commodity companies since before Peabody was founded back in 1883; namely, competition and overreach. A quick look at this chart shows that coal’s experience isn’t quite unique.
Like everyone else in the digging and drilling business, coal enjoyed the highs of the supercycle before the big comedown. It was the run-up that provided the wherewithal, and perhaps the hubristic impulse, to do what commodity producers often do in the wake of high prices: Go on an acquisition spree.
It shouldn’t come as a surprise that the companies that rank high on the industry’s M&A league table — Peabody, Alpha Natural Resources, Walter Energy and Arch Coal — have now all filed for bankruptcy. Higher leverage left each of them vulnerable to competition from a rival industry that had also plowed billions of dollars into expansion: natural gas.
If you go back to the price chart above, you’ll notice that gas didn’t take part in the rebound that coal and oil enjoyed in 2010 and 2011. By then, the shale boom had already upended expectations of supply shortages and, by 2012, gas had dipped back below $2 per million British thermal units for the first time in a decade. The same dynamic would play out, albeit somewhat later, in oil.
For the rest of this column, click here: http://www.bloomberg.com/gadfly/articles/2016-04-13/peabody-s-death-throes-threaten-gas