How Low Will Patriot Coal Go?

Shares of Patriot Coal (NYSE: PCX  ) hit a 52-week low on Friday. Let's look at how it got here and whether clouds are ahead.

How it got here
The simple fact is that we're using less coal than we used to and it's hurting coal stocks across the board. The U.S. used to be powered by coal, a cheap and abundant source of energy, but the falling cost of both natural gas and renewable energy has thrown a wrench in that energy dynamic, and  that's why coal stocks are reaching new lows. Alpha Natural Resources (NYSE: ANR  ) , Arch Coal (NYSE: ACI  ) , and Peabody Energy (NYSE: BTU  ) have followed Patriot Coal lower because of concerns over future demand.

PCX Chart

PCX data by YCharts

It's been a long, drawn-out crash that never seems to end.

Who saves the day?
For a while now, the thesis has been that China will eventually save coal stocks. China's growing economy needs all the energy it can get and coal is a big piece of the puzzle. Add metallurgic coal to the mix and demand overseas should make up for weak demand in the U.S.

The problem with that is China doesn't want to be dependent on anyone else for imports and has a lot of pressure to move away from coal, which is a big contributor to pollution. China is putting limits on coal demand until at least 2015 and is bringing its own production up to meet the demand from electricity producers. The country is expected to add 750 million tons of annual capacity by 2015, lessening the need for imports if coal usage is in fact curbed.

Low-cost natural gas may also be on its way to China. The fracking boom that has driven price down in the U.S. is just now grabbing hold in China and production of natural gas is expected to increase quickly. If the United States was any indication, this should lead to lower-cost natural gas and a push toward natural gas electricity generation.

What's next?
A month ago I said it was time to abandon coal stocks, something that readers disagreed with vehemently. But coal stocks are touching new lows by the day and I don't see much light at the end of the tunnel.

The low cost of natural gas will continue to put pressure on electricity generation from coal domestically, and China's building boom is slowing. As Chinese economic growth slows and China produces more of its own coal, companies will struggle to find demand sources.

CAPS members aren't jumping ship, giving the stock a middle-of-the-pack three-star rating, but I'm not calling a bottom here. Eventually, coal stocks may regain some of their losses; I just don't want to get burned trying to catch a falling knife.

Interested in reading more about Patriot Coal? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

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.

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2012, at 12:50 PM, ecm3131 wrote:

    Time for a little math.

    At $60/ton, 12.5KBTU/lb coal costs $1 per 417KBTU. For NG @ $6.50 per MCF, $1 gets you 153KBTU. Add 1.) the cost of compressing and shipping gas in pipelines and 2.) the fact that 70% of our power plans are coal powered, and it is apparent that there is a major fire sale in progress for many of these coal companies. Take Alliance (AHGP) - they report a stable market (with long-term contracts going out 3-4 years), high profits, and a 5% dividend (I guess that would be a distribution since they are an LP) and the stock still goes down? Are you kidding?

  • Report this Comment On May 07, 2012, at 12:55 PM, ecm3131 wrote:

    Sorry - I should have looked it up. Make that a 6% dividend to go with that 12.5 PE for AHGP.

  • Report this Comment On May 08, 2012, at 11:24 PM, William163264 wrote:

    Its not as if coal is infinite. Coal is a cheap resource for energy, and will be used until the resource is gone. If you think that coal will fall out of favor and we will just leave it there in the earth, I would respectfully say that you are wrong. Coal is getting hurt, but the question should not be whether or not coal will not be used anymore, but which companies have the position to capture the emerging global market, both foreseen and unforeseen.

    If you are saying that PCX is a bad investment, you may be correct, but to throw the whole industry under the bus is not logical in my opinion.

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