Looking at Massey’s Value Following Alpha Takeover Announcement
Massey Energy (NYSE:MEE) is the 4th largest coal company in the United States and the largest in Central Appalachia based on produced coal revenue. On Saturday, Alpha Natural Resources announced that it had struck an agreement with Massey for a $7.1 billion takeover. Massey and Alpha compete with companies like Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI) and CONSOL (NYSE:CNX) Energy.
Massey has a total of around 2.3 billion tons of high quality coal reserves and the combined entity would have over 5 billion in reserves [1] The size and quality of Massey’s coal reserves will enable Alpha to provide top quality products to a wide range of customers including thermal coal for power generating utilities, custom blend industrial coal for industrial customers, and high quality metallurgical coal for use in the production of steel.
Our Trefis price estimate for Massey Energy’s stock before the announcement was $55.08, and the Produced Coal segment accounts for around 84% this value. The announced merger implies a value of around $7.1 billion, which approximately a 27% premium to our estimated value of $5.6 billion.
Growth in Coal Demand Will Continue
Around 5.9 billion tonnes of hard coal were used worldwide last year and 909 million tonnes of brown coal. Since 2000, global coal consumption has grown faster than any other fuel. The five largest coal users – China, USA, India, Japan and South Africa – account for 82% of total global coal use. [2]
The EIA in its Annual Energy Outlook 2010, expects coal production to increase between 2008-2035, driven by increasing demand for electricity generation, along with the start of several coal to liquids (CTL) plants. In addition to this, with oil prices expected to increase in the future, this is expected to increase demand for coal-based synthetic liquids. The EIA in its Annual Energy Outlook 2010 also compares cases where coal prices are higher and lower than its reference forecast, and assesses the demand for coal under these circumstances. The result from these findings indicate that substantial changes in coal prices in the future will likely have a moderate impact on demand for coal.
Between 2008 and 2035, the total coal production is expected to increase by 5.6%,with a significant portion of this growth coming between 2010 and 2017. The coal production is expected to increase by 9%. The main downside to coal production comes from green house gas (GHG) legislations, due to the high cost of capital for investments in technologies that would be required to comply with these regulations. [3]
The total amount of coal sold to utility customers by Massey has been relatively stable between 2005 and 2009, averaging around 28 million tons as Massey maintained its production levels to support strong global demand. The total amount of coal sold to utility customers was not impacted during the economic downturn as utility coal is used in power plants for generating electricity, the demand for which is largely inelastic.
Going forward, we expect the total coal sold to utility customers to increase slightly to 30 million tons, as the company expands its production capacity to support further growth in global demand. However, with the increasing demand for electricity generation, there can be an upside to our forecasts. If the total coal sold to utility customers increases to 32 million tons, it would mean around 4% upside to our current price estimate for Massey’s stock price.
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