Donald Trump’s surprise victory in the presidential race on Nov. 8 put some extra topspin on what had already been a surprising investment success for vulture investor George Schultze: Arch Coal. Shares in the St. Louis coal producer jumped 35% by the end of the week to over $85, not bad for a company that had exited Chapter 11 bankruptcy only the month before.
Investors probably figured Trump would remove the Obama administration pollution regulations that have helped strangle coal demand. That wasn’t Schultze’s investment thesis when he bought into Arch at the beginning of this year, however, and nothing Trump does can change the fact that vast amounts of cheap natural gas will pressure coal prices for decades to come.
Schultze bought Arch because it was cheap, period. His Schultze Asset Management started buying Arch’s senior secured debt at 30 cents on the dollar after the company filed for bankruptcy in January. At that price, Schultze calculated he was buying equity in a reorganized Arch at $10-$12 a share, compared with its current price of $77.
“The first quarter of this year was a good time to pick up some debt in the coal industry,” Schultze said, what with virtually every other big coal producer including Peabody Energy, Alpha Natural Resources and Patriot Coal in severe distress or in bankruptcy already. That puts a damper on future coal production in the U.S., since many marginal mines may have been closed forever. And Arch in particular gets more than 6% of its revenue from metallurgical coal, where the market is relatively untouched by pollution regulations and Chinese steel producers stimulate strong demand.
Schultze’s dive into coal was a typical move for the $200 million (assets) manager, which specializes in buying distressed securities in companies that often present thickets of legal problems to untangle. Schultze, a Rutgers grad who dual-majored in law and business at Columbia, also wrote “The Art of Vulture Investing.” He has his eye now on oil and gas drillers, who are going through their own restructuring cycle complete with thorny legal issues including whether they must honor long-term contracts with pipeline operators