It's Time to Abandon Coal Stocks

Coal has been one of the most important sources of energy for the U.S. since the invention of electricity. It's cheap, abundant, and it's supported millions of jobs over the years. But everything must come to an end, and coal's best days may be behind it.

The U.S. Energy Information Administration estimates show that coal consumption will drop this year to levels not seen since 1996. The party is coming to an end and coal's reign as prom queen is over.

Natural gas driving the change
Cheap natural gas has been the driver of our reduced use of coal, a trend that will likely continue because the U.S. has an abundant supply of natural gas and plenty of drillers to find it. The natural gas boom in the U.S. is also leading China and Europe, two major coal importers, to look into fracking for energy. That could put a damper on the hope for growing exports.

Patriot Coal (NYSE: PCX  ) , Alpha Natural Resources (NYSE: ANR  ) , and Peabody Energy (NYSE: BTU  ) have hoped that a pickup in economic activity in the U.S. and growth in China would fill demand in coming years. It doesn't appear that either demand source will raise these companies from the doldrums, and both countries are looking to energy sources other than coal in the future, muting demand growth in the U.S. and in China.

Arch Coal (NYSE: ACI  ) hoped for "a multi-year upswing in the coal market" that has failed to keep its stock from tumbling. Coal is still responsible for a significant portion of our energy generation, around 40%, but newer, cleaner, cheaper alternatives will continue to put downward pressure on its use.

Renewable energy is the next threat
So far, the impact renewable energy has had on the grid has been small. There just hasn't been enough wind, solar, or biomass to make coal or natural gas tremble. But that's about to change.

Wind's base has grown considerably in the last decade and it will continue to play an increasing role in coming years. Solar has reached grid parity in parts of the U.S. and grew more than 100% in 2011. Solar's small base will soon become a significant portion of our electricity infrastructure and continue to put pressure on coal demand.

In China, where investors have placed a lot of hope for coal, they expect to install at least 4 GW of solar in 2012, reducing the demand for U.S. imports.

In the spirit of backing up this call, I'm adding underperform calls for Patriot Coal and Peabody Energy to my CAPS portfolio. For the rest of my picks, click here. And don't forget to check out our pick for the only energy stock you'll ever need. Get the report for free by clicking here.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (23) | Recommend This Article (18)

Comments from our Foolish Readers

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  • Report this Comment On April 05, 2012, at 10:28 AM, dwillis77 wrote:

    this article - swing and a miss.....

  • Report this Comment On April 05, 2012, at 10:33 AM, Borisbmx wrote:

    coal stocks are cyclical and have fallen 80% the past 12 months. Obama may not realize this but you can't make STEEL without Coking Coal. This cheapnatural gas will be exported to markets where the price is 5x to 7x higher then USA.

  • Report this Comment On April 05, 2012, at 10:43 AM, DAG1996MF wrote:

    lol This article is an April Fool's joke right? Or, perhaps it's true that the whole world (not just the EPA's tiny jurisdiction) will stop using all forms of coal tomorrow at 9am! Oh my, FIRE!! To achieve that, despite the actual facts that limit future coal plants in the US, all existing coal plants and everything else related to coal will be vaporized by wind-powered ray guns promptly at 8:59am tomorrow morning. Get your popcorn ready folks!! Or perhaps it's just time to abandon clueless pundits and take away their pencils.

  • Report this Comment On April 05, 2012, at 11:01 AM, DAG1996MF wrote:

    by the way, another thing this article is spot on about... now is indeed the perfect time to sell coal stocks... as everyone knows, the goal is to buy high and sell low. lmao

  • Report this Comment On April 05, 2012, at 11:08 AM, Toroman wrote:

    So we wait until coal stocks are bottoming to post this? Such insight!

    Yes - cheap natural gas is a game changer but don't think for a minute that prices will stay in the current range. Currently NatGas is selling well below full cycle replacement costs.

    Or maybe you think our omnipotent EPA will regulate the entire world.

    Once all current Green Energy usage laws are fully implemented - homeowners will find their monthly utility bills are as high as their mortgages. Think voters will stand still for that?

  • Report this Comment On April 05, 2012, at 11:11 AM, Hairy0524 wrote:

    Hopefully this call is followed by the Moneyball exercise that The Fool has implemented. I'd be interested to see how this call plays out if a Republican President is elected.

  • Report this Comment On April 05, 2012, at 11:22 AM, prravin123 wrote:

    If a republican president is elected, I expect coal or even the stock market to do better... There is so much uncertainity created by the government now... but still coal sector will not die just because US EPA issued some non-sense standard... Standards should be gradually improved... Not just saying you should implement things like natural gas immediately... what was the government doing to improve the emission standards so far... It looks like EPA has not clue what it is doing...

  • Report this Comment On April 05, 2012, at 11:42 AM, cluesow wrote:

    Agreed - It's time to abandon shallow Motley Fool articles. This is so bad I had to comment. This article leaves me with no confidence that the author knows anything about the coal industry. First of all, the link in the sentence, "That could put a damper on the hope for growing exports.", is to another Fool article that's BULLISH on US coal companies. This alone says to me that this article is designed not to inform but to influence. Maybe Travis intended to underline only "growing exports" and not "damper on the hope for growing exports". "Hope"? Good grief. How about the fact that China's coal use was up 9.7% in 2011, biggest increase since 2005 or that China's coal import number was up 3.9% yoy in Jan. 2012. How about BTU's range of analyst 1-yr target prices of $45 to $60 or average analyst 2013 eps estimate increase of 50% over 2012? So Travis, how about some data or information to back your punditry; are you short coal?

  • Report this Comment On April 05, 2012, at 11:53 AM, lslobovia wrote:

    I thought China was still adding a large number of coal as well as nuclear plants. Also the US coal plants being converted to gas seem to be the super polluters that are decades old and have not kept up to reasonable standards regarding pollution. The "100 year supply of natural gas", according to industry ads, has recently been estimated to actually be a 20 year supply at current use levels only. This article seems to be poorly researched.

  • Report this Comment On April 05, 2012, at 12:31 PM, DAG1996MF wrote:

    Indeed, reports as recent as a few days ago clearly state that China, Japan and India are significantly increasing coal imports... but enough with those silly facts already. In all fairness, I shouldn't be so critical since I'm actually very happy that there were so many geniuses out there selling all their coal stocks yesterday... it made them really cheap for me to buy up.

  • Report this Comment On April 05, 2012, at 1:50 PM, cluesow wrote:

    I need to update my comment - FWIW, I just saw that Zacks lowered their price target on BTU to $28 because, "the fourth-quarter results missed our projection by quite a margin". But it's odd that the downgrade came on 3-27, almost 3 months since BTU gave Q4 2011 results. Like I say, FWIW... At $28/sh, that gives BTU and earnings yield of at least 12%. FWIW, (not much), my target price is $45. The ONLY issue I have is the 1B in underfunded pension costs, which brings debt/equity from about 1.19 to around 2.

  • Report this Comment On April 05, 2012, at 2:53 PM, Mikey925 wrote:

    Sorry Travis, but your article is about TWO MONTHS late.

    As for the EPA, there are only "proposals" on the board and they have no effect on any previously built coal-fired power plant, or any coal-fired power plant being built THIS year.

  • Report this Comment On April 05, 2012, at 7:41 PM, MNGPHR wrote:

    it is cost prohibitive to replace the largest coal fired power plants with natural gas. Another thing is that gas turbines are not meant to be run as base load, although they do work really well as peaker plants. We will have fun paying our electric bills once we see the maintenance costs. The future of energy is still going to be coal and nuclear for base load plants. But hey keep writing articles like this and give me a cheaper entry point into all coal stocks, and I will love you for it.

  • Report this Comment On April 05, 2012, at 11:08 PM, lvmech5 wrote:

    I have worked in the coal business all of my life. Coal will not leave anytime soon. As for wind generation it has already overloaded the transmission lines. It takes a large portion of the energy produced to get it delivered to homes. It will be almost impossible for wind to cause any severe damage to the coal business.

    As for natural gas the price will be on the rise soon. Producers are already putting the brakes on new drillig. Like every other business in the wourld you can't sell your product for less than what it cost to produce or you will be out of business. Don't give up on coal companys yet. They will be around for a long time.

  • Report this Comment On April 06, 2012, at 2:00 PM, cluesow wrote:

    Just a little more info, which I thought I'd provide since I was pretty hard on Travis above and he's actually kind of right afterall, at least about the US situation, even though he's probably overstated his position. Peabody management thinks US coal production will drop 2% in 2012 due to coal to nat gas conversions.

    This from BTU's 2011 Annual:

    "Looking at U.S. markets, the Energy Information

    Administration’s (EIA) February 2012 Short-Term Energy Outlook

    projects 2012 U.S. electric power coal consumption to decline

    by approximately 2%. U.S. coal production is also expected

    to decline by 2%, despite slight production expansion in the

    Western region. U.S. producers will look to increase exports as

    domestic markets remain weak relative to historic levels and

    global seaborne thermal markets provide growing sales

    opportunities.

    The coal-fueled electric power generation decline in 2012 is

    projected to be primarily driven by depressed near-term natural

    gas prices that are resulting in elevated levels of coal-to-gas

    switching,..."

    Here's a list of coal to gas or bio-fuel conversions from sourchwatch, though who knows how exhaustive it is: http://www.sourcewatch.org/index.php?title=Coal_plant_conver...

    Where Travis falters is the paragraph containing the link to "damper on the hope for growing exports". China as well as India will likely be burning coal for some time. This article speculates that Chinese and Indian exports could double by 2015. http://www.reuters.com/article/2011/05/30/us-coal-asia-idUST...

    And I gave some data above that supports continued coal importing by China as well.

    So, bottom line is yes, US coal use/production will drop as nat gas takes over, (and it's looking like nat gas will remain at low prices for quite a while), but global demand, China and India is going up. BTW, Peabody is waiting for approval to build a 54M/yr port in Washington to export coal to Asia. http://www.sourcewatch.org/index.php?title=Gateway_Pacific_T...

    I do find these M Fool blurbs to be just that : blurbs. I imagine the Fool knows what it's doing, but they might try publishing longer, more in depth pieces. I guess the for-profit web is all about traffic; alas.

  • Report this Comment On April 06, 2012, at 5:21 PM, ayalara wrote:

    A few months ago I was in Wyoming watching the seemingly endless stream of trains hauling coal eastward and was thinking that if coal usage does fall off, this railroad will be in trouble too.

  • Report this Comment On April 06, 2012, at 8:56 PM, Edeskimo wrote:

    This article suggests capitulation is near in the coal stocks.

    We still need the coal to generate power and produce steel. For all the talk of a China slowdown they are still growing their economy 7.5% next year and many emerging markets are also growing and building out infrastructure.

    It will soon be a good time to get back into coal stocks and they may already have bottomed. ANR is probably a good one to buy eventually because of their met coal and access to export markets.

  • Report this Comment On April 07, 2012, at 1:54 AM, gileb wrote:

    Where did you take your info Travis?

    China is using 3.2B tons of coal per year and 80% used to generate power energy. Power needs increased by 30 % in last 2-3 years and it's growing.

    World needs for cooking coal in Steel industries is consuming 800M tons per year with increasing average 20% per year since 2006.

    Listen those and come back with lighted news. fool.

    http://www.worldcoal.org/blog/category/coal-news/

  • Report this Comment On April 07, 2012, at 12:11 PM, jerryguru69 wrote:

    ummm...Mr. Hoium, would you be willing to admit that abandoning solar is just as justifiable as abandoning coal for the same reason: dirt cheap natural gas?

  • Report this Comment On April 09, 2012, at 2:24 AM, JadedFoolalex wrote:

    anyone realize that the sun doesn't shine all the time? The wind also doesn't blow all the time either, so when is coal going to be phased out?

  • Report this Comment On April 09, 2012, at 8:22 AM, dstb wrote:

    Cheap natural gas is not the reason coal usage is down. It is the never ending beat of the far left environmental agenda. The EPA has been co-opted into pushing this agenda due to politics not science.

    We should be using all cheap and economically feasible sources of power in this country to include coal and natural gas.

  • Report this Comment On April 09, 2012, at 10:20 AM, CluckChicken wrote:

    Coal isn't going away over night, but it is heading for a significantly small percentage of usage and it will have its specialty needs. The DOE is projecting a decrease in coal generated power over the next 5 years and the number of requests for new coal plants is nearly none after 2017. Even if gas prices move up to the 3.50 - 4 range that the energy groups want gas will still be a very cheap energy source with significant advantages over coal. Wind power is not going replace coal but that, cheap gas, improvements in solar power (such as 3Ms transparent solar film) and general power efficacy improvements will reduce the demand for coal.

    China is currently building 25 nuclear plants and has also started to deal with the significant pollution issues they have, both these are not good for coal futures in China. India wants to become a world leader in nuclear power and is starting investing in developing more plants to replace coal plants. Europe has been moving far quicker to cleaner renewable sources for years and even developing nations have been going for cleaner sources.

    None of this pants a good picture for coal over the long term, and it does not suggest that the market will be able to handle as many large players as there is now. Short term spikes may happen to stock prices and increases when the inevitable consolidation happens, but the long term picture is a slow steady fall.

    3M: http://www.pcworld.com/article/241152/3m_film_turns_windows_...

    DOE: http://www.netl.doe.gov/coal/refshelf/ncp.pdf

    Nukes: http://world-nuclear.org/NuclearDatabase/rdresults.aspx?id=2...

  • Report this Comment On April 13, 2012, at 1:55 PM, Praguegypsy wrote:

    Rothschild is buying coal companies, that's a fact. Who is big behind the CO2 scare? NWO/Rothschild. Could it be that he is using the environmental bimbos to help him to drive coal companies' stocks down so he can buy on cheap? I don't have the research power available to Buffet or Rothschild, so maybe just following their footsteps may be the second best practice. I'll bet that after he has assembled his coal empire, the CO2 will disappear from the mass media (if they are still around).

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