Thread by @tomwirth65

I’ve been thinking a lot about my investment in $BTU recently. After having a ten-bagger, I been wondering if I’m not just greedy expecting more. So, I’ve dug deep in analysis. A 🧵1/n

As background I first purchased in early April 2021. I can’t thank @contrarian8888 and @NICKRADICAL4 enough for the idea. Both of these fine gentlemen are world class investors. The former already a legend and the latter a legend in the making. 2/n

Initially the story was very basic, Peabody was an over leveraged company in a depressed industry that was seeing some price stability and significant demand/supply imbalances. As @NICKRADICAL4 pointed out $BTU supplies 1 out of 20 homes in America with its electricity. 3/n

By the 4th quarter of 2021, prices had recovered so well that the company actually earned about the same amount as I paid for the stock. In other words, my cost/earnings was around .25! 4/n

$BTU has spent the whole of 2022 transforming their balance sheet. As they exit the year, they have significant net cash. 5/n

With approximate projected $2 billion in cash prior to paying down more debt in the 4th quarter. In other words net cash of close to $1.5 billion. Keep in mind their current market cap is approximately $4 billion. 6/n

Now as we enter 2023 the company is on the record that capital returns to shareholders will be priority 1. Keep in mind they have been restricted from share buybacks and dividends due to debt covenants and surety bonding. All this is being resolved. 7/n

In their November presentation,they laid out the expected 2023 cash flows:
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Focusing on cash flows at spot prices, the company should have about $1.8billion in fcf. If we look at the delta from the forward curve to spot prices it is about 10% for both seaborne thermal and Met which is where all the unpriced production resides. 9/n

At this delta, Peabody produces $300 million more in cash flow. This presentation was on 11/17. Let’s look at pricing as of that date:
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Peabody receives pricing on its seaborne that it a percentage of the Newcastle price. So, as we can see from the above graph, spot pricing is currently about 20% above where it was in mid-November. 11/n

So, at current spot prices using the delta of $300 million per 10% move, Peabody would be expected to produce almost $2.5 Billion in fcf for 2023. 12/n

The few analysts in Wall Street all expect pricing to be significantly lower in ‘23 vs’22. We know the reasons why… decline in fossil fuels, war In Ukraine etc. etc. 13/n

But here, once again, I have to thank @NICKRADICAL4 for reminding me in his must listen to interview with @marketplunger1 podcasts.apple.com/us/podcast/nic…
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In it Nick reminds me that when everyone has the same argument, it is widely known and already in the price. I suspect that prices will stay higher for longer simply because it is the path of least resistance. 15/n

That being said, the IEA last week said 2022 will be the largest coal usage on record surpassing 8 billion tons for the first time. Is there any reason to think the trend will reverse in 2023? 16/n

On the contrary, coal plants are being recommissioned in Europe as the supply of gas from Russia has been cut off. The drought in Western US has meant that hydro power has been curtailed and coal has picked up the slack. Emerging markets continue to add coal power 17/n

So demand will continue to increase while supply is shuttered by western government policies. The natural depletion of current mines are not being replaced by new mines. 18/n

Coal companies like Peabody are spending minimally on new projects and companies wishing to rid themselves of current mines are finding no willing buyers. All of this leads me to believe that coal prices will remain strong for the foreseeable future 19/n

So let’s get back to shareholder returns for BTU. If we use #ARCH as an example, they are returning 50% of free cash flow as dividends and 50% to share repurchases. Now BTU may want to put some cash on the balance sheet for a rainy day fund…. 20/n

So let’s use $1.6 Billion as baseline. 1/2 to divide and 1/2 to repurchases. That would be $5.60/sh or a yield of around 20%. And if they were to buy back the shares at $30 then another approx 20% retirement of shs out. The numbers get better if pricing is improved. 21/n

Then we can rinse and repeat in 2024. I don’t believe with these numbers that the price can stay at $30. I suspect, as the higher for longer thesis gains more traction, we will see the sp rise another 3x over the next couple of years. 22/n

When I first bought shares 1 1/2 years ago I told a few friends that I own the most hated company in the most insidious industry. As more people understand the importance of coal for the entire world, I think that mantra will no longer be valid and sp rise will result. 23/n

I hope some will find this thread of value. Many thanks for reading to the end. 24