Peabody Energy Corp. stock rose through the morning of Aug. 1 with the news of new debt reduction and capital return initiatives.
Peabody announced specific aims to reduce debt and authorized a $500 million share repurchase program in its Aug. 1 earnings report before the market opened. The announcement highlighted liquidity, debt and deleveraging targets.
"We are pleased to accelerate our debt reduction activities and authorize a share repurchase program recognizing the strength of our second quarter earnings and steps taken by the organization to optimize future cash flows," Executive Vice President and Chief Financial Officer Amy Schwetz said in the earnings announcement. "Our simple, but powerful financial approach is to generate cash, reduce debt, invest wisely, and return that cash to shareholders. Based on our robust cash profile, we have established a capital structure that we believe is both flexible and sustainable throughout the cycle."
Shares of the company's stock had already risen from $28.04 at close July 31 to $29.98 just before the company's call with investors at 11 a.m. ET. Before the call was over, shares were trading as high as $30.29, up 8.0% over the prior closing share price.
As markets for placing coal remain somewhat tight, Schwetz said on the Aug. 1 call that the post-reorganization Peabody, which is the world's largest private-sector coal company, is not a company that is about producing as much coal as possible.
"The new Peabody isn't about volumes but about margins and returns," she said. "Based on early analysis, Peabody's Powder River Basin margins of 23% once again topped the competition, and that's the kind of leadership we look to continue in order to create superior shareholder value."
The company also said it is evaluating a sustainable dividend program it aims to commence by the first quarter of 2018.
Peabody is also targeting $300 million in deleveraging by the end of 2017 and is aiming to reduce debt levels by $500 million within 18 months. The company made some progress toward that goal with a $150 million payment on its term loan in July, according to executives on the call.
"For a company of our size and scale, we believe that some debt on our balance sheet makes sense, and we will continue to utilize the cheapest form of capital available to us within our financial guidelines," Schwetz said. "As a result, we have evolved towards an aggregate debt target."
She added that based on expected cash generation, Peabody is now targeting gross debt of $1.2 billion to $1.4 billion.
FBR & Co. analyst Lucas Pipes wrote in an Aug. 1 note that Peabody's EBITDA of $300 million beat FBR's estimates by $18 million. He said FBR believes that $50 million of Peabody's share repurchase authorization may be utilized in 2017 based on existing debt covenants, "leaving the bulk of the authorization to be presumably utilized in 2018."
Addressing restrictions, Schwetz said Peabody would begin immediate efforts within the confines of its credit agreement but could look outside those bounds in the future.
[W]e're not going to let our debt documents restrict us in terms of what we can do," Schwetz said on the call. "So as we move forward, we will look at what the opportunities are to either amend or refinance if we feel that they're restricting our progress."
FBR's most recent flash note on Peabody has the company rated "outperform."