There's No Unseating King Coal

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Last year's record run in crude oil prices renewed calls to develop other fuel sources. Yet while natural gas has received a lot of attention as a potential clean fuel source, the abundance of coal in the U.S. makes it another obvious choice for further energy development.

For years, though, environmental regulations have limited the use of coal from certain areas of the country. For instance, coal from the Illinois Basin has a relatively high sulfur content, and as a result, Illinois Basin coal production declined from nearly 160 million tons in 1990 to just more than 88 million tons in 1998, as coal-burning utilities complied with the Clean Air Act.

Recently, though, coal production has begun to grow again. And with some recent moves from the Obama administration, coal could grow even further as part of the government's alternative energy policies.

Movement already
The Department of Energy is restarting a clean coal project in Illinois that was halted by the Bush administration in 2008. The administration is pledging $1.1 billion, with another $400 million to $600 million to come from a group of utilities and coal producers that includes Peabody Energy (NYSE: BTU), BHP Billiton (NYSE: BHP), and Southern Company (NYSE: SO).

Concerns about peak oil have re-energized efforts around alternative sources of energy. And if coal-based alternatives prove viable, there is plenty of coal in America to make it happen:

Country	Recoverable Coal Reserves (short tons)
United States	263.8 billion
Russia	173.1 billion
China	126.2 billion
Australia	84.4 billion
India	62.3 billion
South Africa	52.9 billion

Source: Energy Information Administration.

Coal is already the most important source of electricity in the United States and many other countries, for the simple reason that it is cheap. More than 1.4 billion megawatt hours of electricity were generated by coal-fueled plants for the year that ended March 31, representing nearly 60% of total electricity production in the U.S.

Alternative to oil
The technology to convert coal into a liquid fuel has been used for decades. South African oil company Sasol (NYSE: SSL) is a world leader in the field, as it makes gasoline and diesel fuel from both natural gas and coal. The company is currently working on ventures in Qatar, Nigeria, and China for coal-to-liquids plants.

If the necessary political will is present in the U.S., the technology should ultimately become popular here as well, given our huge coal reserves. It will be a great competitive move if Sasol can partner with a large refiner like Valero (NYSE: VLO) -- which has experience on the oil front with difficult feedstock like heavy sour crude -- or even ExxonMobil (NYSE: XOM), which has a huge cash pile for potential investment.

Where to invest
At the moment, Sasol looks like an attractive investment, especially for those who see coal-to-fuel technology as an important next step in alternative energy. Sasol's shares currently trade at six times earnings, while the company has more cash than debt, a return on equity of 35%, and nearly $20 billion in annual revenues.

Meanwhile, among coal producers, Peabody Energy is the largest private coal company in the world. It provides fuel for 10% of U.S. electricity generation -- and it also has the largest coal reserve base at 9.2 billion tons. If there is a best-of-breed coal stock, Peabody is it. Much of its reserves are concentrated in the Powder River Basin, which is famous for its low-sulfur coal. The stock trades at less than eight times earnings, and it shows a return on equity of 35% with reasonable debt levels.

Yanzhou Coal Mining (NYSE: YZC) is a large Chinese coal miner whose shares have already spiked higher. The Chinese derive about 80% of their electricity from coal, so even with calls to increase use of renewable energy, the company will remain important to China for many years. The shares have done very well in 2009, rising 75%, but even with that price jump, this is definitely one to keep on a watch list. For a broader sector play, check out the Market Vectors Coal ETF.

Talk of wind and solar energy is fine, but the way I see it, coal will continue as an important power source for a long while. And if new initiatives bear fruit, then coal could easily become an important source of alternative energy itself.

More on market issues:

• Your Royal Audience With the King of Coal
• Arch Coal Opens Wide
• Coal Continues to Surprise