Sorry Coal, Natural Gas Exports Won’t Help You

The natural gas boom has touched several different sectors, but not always in a good way. With so much excess production, gas prices are still toiling at 10-year lows. Not only is this hurting exploration and production companies, but the most direct competitor of natural gas as well: coal.

There's an idea out there that exporting natural gas could help to bring stability to spot prices, which could be a life preserver for the coal industry. The reality, though, is that the estimated benefits of exporting gas may be more like a set of water wings.

Don't bring me down, gas
For over 15 years, U.S. coal has sold at a healthy discount to natural gas on a BTU basis. That is, up until about 2011. Once several exploration and production companies learned how to tap unconventional shale gas in a commercially viable manner, production soared and prices plummeted.

Sources: U.S. EIA, BP Statistical review of World Energy, and infomine.com (authors calculations)

With those low prices, so too have the profits for coal companies.

JRCC Net Income Quarterly Chart

JRCC Net Income Quarterly data by YCharts

Cliffs Natural Resources (NYSE: CLF  ) and Peabody Energy (NYSE: BTU  )  have been able to hang on to profitability for longer than Arch Coal and James River Coal. Cliffs has done so because almost all of its coal operations are focused on metallurgical coal, which commands a $35.00 premium per short ton. Peabody, on the other hand, has a stronger presence in the Asia-Pacific market thanks to its operations in Australia, which makes for greater exports. This leaves Arch and James River, whose operations are only in the U.S., as some of the biggest losers in the space.

Slowly but surely, though, the combination of natural gas undercutting thermal coal prices and waning economic growth have taken a toll on all coal company revenue streams in the past 18 months.

With natural gas flooding the U.S. market, now there is the very real possibility that America will start to export natural gas via liquid natural gas, or LNG, terminals. Cheniere Energy (NYSEMKT: LNG  ) is in the process of bringing online two LNG export terminals in the Gulf of Mexico, and several companies are swift on its tail to do the same. In theory, a new market for U.S. natural gas could help to boost prices, which in turn would make coal more attractive.

The verdict
Sorry to tell you, coal, but natural gas exports will not give you the relief you are looking for. A recent study by Deloitte shows that the effect of exporting natural gas will increase natural gas prices by about 15 cents during the period 2016-2030. A 0.4% increase just won't be enough to make a dent in that price gap for coal.

What a Fool believes
Between the emergence of cheap natural gas, the slowing demand for metallurgical coal, and the potential for tighter pollution regulations from the EPA, the coal business is not the most attractive space right now. Coal will probably still be a major player in electricity generation for years to come, but it will become less and less of a player as long as it remains at a price disadvantage.

Because of this, exports are becoming a much bigger part of the domestic coal landscape. Thanks to its operations in the U.S. and Australia, Peabody Energy has deals in place to get its cheaper coal to India, China and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is perhaps most worthy of your consideration. Don't miss out on this invaluable resource -- simply click here now to claim your copy today.


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  • Report this Comment On January 23, 2013, at 10:10 AM, jambo297 wrote:

    Beg to differ with you and the Deloitte study. Big statement from a nonacademic but one sho has observed the natural gas / coal price and usage relationship since 1976 when I started in the power plant supply and repair business.

    I looked at the study today after reading your latest two articles about LNG export possibilities. What a nice smooth curve for n. gas price Deloitte assumes? Do we have constant ability to supply?

    See the US Energy Information Agency weekly reports to see how volitile the n. gas price over time has been:http://www.eia.gov/naturalgas/weekly/. Sure the shale gas industry and supply have boomed and brought supplies up and prices down. The November 2012 n.gas in storage is the highest ever recorded. But since Nov. gas in working storage has dropped 20%; rIg counts have dropped 45% since 2011. The EIA predicts $4.00 gas - up from 3.43 this week - by December. While the Deloitte study seems to indicate that $4./mmbtu level (fig 2.6) also, it sure looks awfully flat, easing its way up to $5.50 or so in 16 years. The EIA shows the interval at the 95% confidence level of their $4. prediction to be $2.27 to 6.80. Given historic volitility, and the fact that US utilities increased n. gas usage about 29% in 2012 (and will continue), my bet is the n. gas price will be a trace more volitile in price.

    Some coals (IL and WY) are already competitive for fuel at $3.50/mmbtu gas. IMHO Appalacian coal will start displacing n. gas at $4.5- - $5 gas like it did in the late 1990's. In my case the conclusion for USA LNG exports is the same. My scenario says Henry Hub price will be more volitile, and move up more quickly and cause hiccups in Cheniere and others' plans.

    Joe - long on PVR and JOY as coal plays.

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