The recent, near-simultaneous declarations of bankruptcy of the largest coal company in the U.S. and the largest solar power company drip with irony and raise several cocktail-party-worthy topics of discussion. The imagery is stark—coal typically is deep in mines where no sunlight penetrates while sunlight is abundant and beaches around the world are crowded with humans stretched out to bask and soak up the rays.
Coal and sunlight are at two ends of the spectrum in terms of sources of energy, with oil, natural gas, nuclear power and wind spanning the middle. Coal faces severe economic headwinds, driven less by the cost of the resource but more by the necessity to treat the environmental byproducts of its combustion. For Peabody, the coal company, the increased availability of cheap natural gas from the shale revolution and the vast and growing infrastructure to transport it to industrial and residential consumers represents an economic headwind that has proven to be too stiff to withstand.
SunEdison, the solar power company, faced a market where the cost of solar panels had come down sharply following the collapse of the solar industry across Europe with subsidies drying up as governments dealt with their individual debt challenges in the aftermath of the financial crisis. The company once stood at the head of the line of “alternatives” championed by the army of those advocating a “fossil-fuel-free” world. However, as its earnings outlook proved disappointing, SunEdison’s penchant for financial engineering (debt-laden acquisitions and recasting as a “yieldco” for income-seeking investors) contributed to its downfall.
From an investment perspective, these events point to the importance of “knowing what you own,” where a robust business model, a strong and durable capital structure and a thoughtful and careful management team are each important elements in assessing the prospects of a company and its stock. Environmental issues can be both risks and opportunities for companies but it is how a company responds to and integrates these issues that may determine its long-term success.
