Cloud Peak Energy mines coal from its Antelope mine in the Powder River Basin.
Cloud Peak Energy Inc. recently bought a few more weeks to work with its creditors to avoid bankruptcy, but industry observers said a court-supervised restructuring remains likely for an operationally challenged company purely focused on a distressed coal region.
The Powder River Basin coal producer had warned that it might file for bankruptcy due to a need to restructure its balance sheet. But it recently struck a forbearance agreement with a creditor after missing the 30-day grace period on a $1.8 million interest payment due March 30. A much larger $17.4 million payment is due May 1, which becomes the company's new deadline for finding an interested buyer or restructuring option before defaulting on its debt.
Westmoreland Coal Co., one of the most recent coal companies to go through bankruptcy, secured a similar delay multiple times on its debt payments before filing for bankruptcy reorganization. Cloud Peak did not respond to a request for an update on its restructuring efforts.
"These types of deferments eventually just lead to the larger question of whether everyone involved might just be better off throwing in the towel and having them declare bankruptcy as there may be more certainty in that process than the current situation where creditors are willing to temporarily forego payment," Robert Godby, director of the University of Wyoming's Center for Energy Economics and Public Policy, said in an interview. "Everyone sees that as an unsustainable outcome, and I kind of refer to where we are now as like treading water in the middle of the ocean."
Cloud Peak's production has continued to steadily decline after sharp year-over-year drops in 2015 and 2016. Meanwhile, the company's net debt-to-EBITDA ratio has been climbing quickly over the past 10 years. In 2018, the company reported a net loss of $718.0 million.
The company, already delisted from the New York Stock Exchange, is unlikely to find a buyer willing to take both the company and its debt, said Benjamin Nelson, senior credit officer and lead coal analyst at Moody's Investors Service. The forbearance agreement buys time to figure out what to do, but the company's assets have lower productivity, higher costs and lower quality coal than other participants in the already-oversupplied Powder River Basin.
"I don't think larger producers would be interested in buying these assets just to shut down the production," Nelson said. "I mean, you'd have to get them pretty cheaply."
A bankruptcy reorganization could lead to reduced production from the region, particularly at Cloud Peak's Cordero Rojo mine, said Joe Aldina, director of U.S. coal research for S&P Global Platts. The mine's lower-quality coal already struggles to compete with other mines in the basin, but a structural decline in the demand for U.S. coal is likely to continue and force even more downward pressure on the coal sector.
"I think it is unlikely that we'd see consolidation as shareholders continue to ask that coal companies make few investments in thermal coal and instead spend limited [capital expenditure] dollars on coking coal," Aldina said.
Cloud Peak may try to sell some of its lower-performing assets, said Matt Preston, Wood Mackenzie's research director for North American thermal coal markets. However, he added that the company could also clear debt off their balance sheets without substantially changing their operating footprint in the Powder River Basin, as Arch Coal Inc. and Peabody Energy Corp. did in their bankruptcy restructurings.
"It seems unlikely that a white knight is going to appear," Preston said.
The company's assets would come with tax and cleanup costs that limit the benefits of consolidation of coal mines in the regions. Further, recent reports by Moody's and the Institute for Energy Economics and Financial Analysis concluded that the Powder River Basin is in a long-term decline with no clear relief in sight.
"I am not convinced at the moment that a company like Peabody or Arch is going to step in to buy mines that may not have any value," Seth Feaster, a data analyst with the Institute for Energy Economics and Financial Analysis, said in an interview. "I'm not sure where the benefit comes from that, from buying that stuff and shutting it down, because there's too much risk in the reclamation costs there. It's certainly clear to us, if it's not clear to them, that most of this demand is not coming back."
The last wave of large, public coal company bankruptcy reorganizations to hit the sector starting in 2015 were mostly the result of large amounts of debt accumulated in a flurry of buying activity around metallurgical coal assets. Now, even companies that did not take debt-fueled bets on the metallurgical coal market are succumbing to the pressures of an ongoing secular decline in demand for thermal coal.
"What can't be ignored here is that a pure-play miner like Cloud Peak finds it can't make money under normal debt conditions in the basin," Godby said. "It is something even a few years ago people would have considered unimaginable. The symbolism of Cloud Peak's struggles is really telling when thinking about the current realities of the U.S. domestic thermal coal market."
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.