The Challenges for Coal Stocks are Just Beginning

2012 hasn't been a good year for coal stocks, and if the U.S. Energy Information Administration is right, the next eight years aren't shaping up to be any better. The EIA said in its recent Annual Energy Outlook report that 49 GW of coal generation capacity could be retired by 2020 -- that's a sixth of the nation's coal plants.

The level of retirements is only the reference case for the EIA's analysis and will be affected most heavily by the price of natural gas and economic growth. The worst-case scenario for coal is that gas remains at a low price and economic growth remains slow. Under those circumstances, as much as 70 GW could be retired.

Drivers of coal's demise
The EIA says that older, more inefficient plants in the eastern U.S. will be the first to go, pointing the finger of blame squarely at natural gas. Natural gas is hitting coal not only from an environmental-impact standpoint, but also on the marginal rate for power generation, and with the low price of natural gas, this makes coal power plants less profitable.

This is bad news for companies that supply coal to the nation's coal plants. Alpha Natural Resources (NYSE: ANR  ) , Peabody Energy (NYSE: BTU  ) , James River Coal (Nasdaq: JRCC  ) , and Arch Coal (NYSE: ACI  ) have already plunged this year, but the future trends aren't looking any better. They'll need to ration even more capacity to stay in business, and I wouldn't be surprised if losses continued to mount in coming years.

Foolish bottom line
Some investors think that when a stock is down, it will eventually bounce back. For coal, all of the evidence points not to a mere short-term plunge, but rather to a long-term decline in the industry. I still don't think coal stocks are good buys, no matter how far they've fallen, and more will end up in bankruptcy, just like Patriot Coal.

Investors should avoid coal stocks, but there are parts of the energy sector that are thriving. Find out which stock our analyst think is the only energy stock you need in our free report found 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 (6) | Recommend This Article (4)

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  • Report this Comment On August 01, 2012, at 3:57 PM, JJButlerISA wrote:

    More color like how much coal fired generation capacity is being added and the efficiency of the plants being closed would be helpful. Meanwhile, the lost cost producers are eating the high cost over indebted players' lunch.

  • Report this Comment On August 01, 2012, at 4:03 PM, WillyP63 wrote:

    This note should have been written six months ago. Now, gas prices are more than 50% off their lows and PRB coal is again back in the money, leading to gas-to-coal switching. And retirements aren't going to affect coal plants for a number of years, as there are new builds still coming online and the fleet is running well below utilization.

  • Report this Comment On August 01, 2012, at 4:19 PM, cody2005 wrote:

    you are assuming way to much in this article. you are assuming the epa will continue to have the power to attack the industry. a change in washington would be huge plus for coal. you are assuming nat gas stays low. thats not possible because unless it goes above 4.00 or more the drillers will continue to lose money and will be forced to cut back which will drive up the price. once nat gas gets anywhere near 4 see how many power companies switch back to coal. the epa questioning the safety of fracking wont help either

  • Report this Comment On August 01, 2012, at 9:44 PM, admill wrote:

    Loss? Can I ask where is the loss? BTU beat the estimates by $.20, WLT just reported profit of $.43. ACI had a bit loss of -$.10, but it is still cash flow positive from Operations. I don't think ANR will report loss next week anyhow. That leaves JRCC; a much smaller company with much more leveraged balance sheet. Please, the author, check some facts. Maybe you should not write article by just searching for stocks with its 52-week lows.

  • Report this Comment On August 02, 2012, at 10:49 AM, setht23 wrote:

    I'm going to add to the skeptics of this article. Natural gas is artificially low right now. Once it's gets back to a price where NG drillers are actually making money coal will be more competitive. Also if you haven't been watching the news India is having some power generation issues these days. The cheapest/quickest way to address that is coal. I see US exports increasing significantly.

  • Report this Comment On August 04, 2012, at 5:14 PM, Mikey925 wrote:

    This article is quite "shallow" and doesn't even begin to scratch the surface of what is ACTUALLY going on. The EPA has "proposals" out there that would severely cut into coal powered electricity generation with those plants that are old and spewing sulphur and all sorts of other toxins. It will obviously be impossible for these older power generation utilities to be able to meet the same pollution standards as a nat-gas fired utility.


    These are merely "proposals".

    They are NOT law.

    The author also makes many more assumptions about coal going forward... such as the "low" price of natural gas which has already rallied from a decade low of $1.90 all the way up to as high as $3.20 last week in the current Nat-Gas futures contract.

    I really wish that places like The Motely Fool and Seeking Alpha would have some sort of a minimum standard for journalistic integrity. Some of these articles are so "shallow" that they aren't even worth reading. They simply raise more questions than fuel specific answers.

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