Coal producer Peabody Energy Corporation BTU announced that it has entered into a definitive agreement to sell its New Mexico and Colorado coal assets to Bowie Resource Partners, LLC for $358 million in cash, subject to customary working capital adjustments. Bowie Resource Partners will also assume nearly $105 million in related liabilities.

El Segundo and Lee Ranch mines in New Mexico and Twentymile Mine in Colorado were decided to be sold after a competitive bidding process. The combined coal reserve of these assets is nearly 330 million tons. This transaction is expected to be completed in the first quarter of 2016, subject to customary closing conditions and necessary governmental approval.

Need to Sell Assets

The coal industry is currently going through a very rough phase, both in terms of demand and prices. Higher competition from natural gas and alternate energy as a fuel source along with increasing regulatory pressure has been at the root of the decline in coal.

Peabody Energy like Arch Coal ACI, another coal operator, has been incurring losses for the last few quarters. To keep operating in a profitable manner, the coal companies were trying all possible ways to lower costs and reduce debt levels. These included idling mines and reducing production rates as well as the workforce.

The ultimate step in this direction is selling off non-core assets thus putting the focus on core areas. Peabody has been working on this strategy for quite some time as was evident from its third quarter earnings call. Management was advancing on multiple asset sale processes for certain operating and non-mining assets.

Will Asset Sale Help?

The net proceeds generated from the sale of the New Mexico and Colorado mines will help Peabody Energy to repay its existing debts and use the rest for general corporate purposes.

The sale will lower the amount required by Peabody for self-bonding by more than $300 million.

Peabody’s Focus Post Asset Sale

Subsequent to the New Mexico and Colorado asset sale, the company will concentrate on its core regions including the Powder River Basin, Illinois Basin and Australia.

The company will still have quality resources to take advantage of a sudden recovery in the coal markets if it at all materializes. Peabody’s Australian exposure also gives the company an added edge given the rising demand for power in the Asian countries. As of Dec 31, 2014, Peabody Energy held nearly 7.6 billion tons of proven and probable coal reserves and approximately 500 thousand acres of surface property through ownership and lease agreements.

Way Forward for the Coal Industry

Domestic demand for coal is unlikely to improve in the near term, thanks to the Clean Power Plan, under which the U.S. Environmental Protection Agency calls for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. Coal-based power plants are the primary source of CO2 emission.

Amid this backdrop, other coal operators are also resorting to selling assets. Pittsburgh-based CONSOL Energy Inc. CNX has realized proceeds of $101 million from two separate asset sale transactions (read:CONSOL Energy Realizes $101M from Sale of Coal Assets).

CONSOL Energy has also separated a portion of its coal business to form a thermal Master Limited Partnership – CNX Coal Resources LP CNXC. This move could benefit both CONSOL and CNX Coal over the long run.

Peabody Energy currently has a Zacks Rank #3 (Hold).

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