Peabody Energy Corp (OTCMKTS:BTUUQ) Squeezes The Shorts

Peabody Energy Corp (OTCMKTS:BTUUQ) has quickly become one of the most talked about and active names on the OTC Markets. This comes as the stock has rallied from its $2 base to over $18 within five trading sessions. A move this extreme and this violent has one root cause, an epic short squeeze, and Peabody Energy had created a perfect storm for one. When you have a company like Peabody in Bankruptcy and traders betting on a zero dollar recovery, all it takes is some good news to get shorts scrambling. While there are many reasons for this squeeze, all shorts would have needed to do was read our piece last week saying Peabody Energy was in turnaround mode. It would have saved them a lot of grief and made them some money had they signed up for our alerts.First up, a little background on the company. Peabody Energy is the world’s largest private-sector coal company and serves metallurgical and thermal coal customers in 25 countries on six continents. As of December 31, 2015, the company had 6.3 billion tons of proven and probable coal reserves and owned interests in 26 active coal mining operations located in the United States and Australia. The company operates through Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining, Trading and Brokerage, and Corporate and Other segments.On April 13, 2016, Peabody Energy Corporation along with its affiliates filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri. The company is seeking to reorganize U.S. operations in federal court in its hometown of St. Louis, reducing an estimated $10.1 billion in debt, according to court filings. Peabody, which had revenue of $5.6 billion in 2015 and about 7,100 employees globally, filed for bankruptcy in the U.S. allowing Peabody to leave its Australian assets out of the filing. Peabody spent $4 billion in 2011 to acquire Australia’s MacArthur Coal Ltd. MacArthur is one of the leading producers of metallurgical coal, which is used to produce steel. The problem for Peabody is that the company used debt to buy MacArthur and the price of metallurgical coal has tumbled since its 2011 peak.Most companies end up in Bankruptcy because of too much debt and a weakening in its core business. However, what happens when its core business starts to improve? This is the case with Peabody after the company and Japan’s Nippon Steel set the Q4 contract benchmark for metallurgical coal at $200/metric ton, more than twice the Q3 price, Reuters reports. The big jump underscores a resurgence in Asia’s appetite for coal that also has been reflected in a recent mark-up in spot cargoes.When a core business improves, there's the potential for the equity to have value. That's why Mangrove Partners Fund took a 5.2% stake in Peabody and is pushing for an equity committee to be formed. The fund is in the process of retaining legal and financial advisors to assist Peabody in seeking the formation of an official equity committee and to preserve and realize on the "substantial value" of the company's shares.With Mangrove announcing its stake, it sent the shorts covering and also exposed a lot of naked call sellers. It turns out that there was an extremely large open interest in call options compared to the number of shares outstanding. After all, before the improvement in Peabody's Australian operations and the Mangrove stake, things did not look good for BTUUQ. Being short BTUUQ looked like a sure bet. According to the recent 8-K:

It is uncertain at this stage of the Chapter 11 Cases if any proposed plan of reorganization would allow for distributions with respect to Peabody Energy equity or other securities. It is likely that Peabody Energy equity securities will be canceled and extinguished upon confirmation of a proposed plan of reorganization by the Bankruptcy Court, and that the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In the event of cancellation of Peabody Energy equity or other securities, amounts invested by the holders of such securities would not be recoverable and such securities would have no value. Trading prices for Peabody Energy's equity or other securities may bear little or no relationship during the pendency of the Chapter 11 Cases to the actual recovery, if any, by the holders thereof at the conclusion of the Chapter 11 Cases. Accordingly, Peabody Energy urges caution with respect to existing and future investments in its equity or other securities.

Currently trading with a market cap of $191 million, BTUUQ has backed off its highs as profit taking and short sellers stepped back in. Things are certainly improving for Peabody and Mangrove's stake is certainly a big win for equity holders. The firm has posted an annual return of 28% since its founding in 2010. Considering how active the stock is along with the complexity of Peabody's Bankruptcy case, we think the odds of an equity committee being formed just increased immensely. We will be updating our subscribers as soon as we know more. For the latest updates on BTUUQ, sign up below!Disclosure: We have no position in BTUUQ and have not been compensated for this article.