Duke Energy (DUK -0.81%) is one of the largest energy generators in the United States with over 57,700 MW of owned generating capacity. It has scrambled in the last few years to shift away from a coal-heavy portfolio and into the cheaper, cleaner arms of natural gas. In 2011 60% of the company's generating capacity was chalked up to coal versus 1.4% for oil and gas, which last year quickly changed to 46.2% and 16.6%, respectively.
No matter: the company's coal capacity is still one of the highest in the industry. It is much harder than it seems to make such a switch, so Duke Energy investors will be exposed to large amounts of coal for the next few years. Turns out that may not be such a bad thing after all.
Despite all of the hoopla surrounding natural gas it is still looking up to coal in the standings. With natural gas prices soaring over the winter and remaining higher this spring compared to the year-ago period, coal has actually regained some lost ground.
Source: EIA
It may sound like a sick joke, but could coal actually send Duke Energy shares higher? Or is this just a short-term trend? Let's review.
Prices drive generation
Calling this a short-term trend depends on your definition of the word "short term". It also depends on your faith in energy projections. However, it seems unlikely that natural gas prices will return to 2012 levels any time soon. I believe the industry learned its lesson from cranking the supply faucet too far open and saturating the market. Besides, once commercial-scale manufacturing plants and liquefied export facilities open to exploit reserves there will be more sources to stabilize and prop up prices.
Natural gas prices have roared back from the lows of last year to a more "normal" average. Here's how the EIA predicts prices per MMBtu and generation in kilowatt-hours per day through 2014 compared to historical averages.
|
2011 |
2012 |
2013 |
2014 | |
|---|---|---|---|---|
|
Natural gas price |
$4.73 |
$3.39 |
$4.55 |
$4.74 |
|
Coal price |
$2.39 |
$2.40 |
$2.40 |
$2.44 |
|
Natural gas generation |
2.777 |
3.363 |
3.116 |
3.052 |
|
Coal generation |
4.749 |
4.145 |
4.507 |
4.575 |
Source: EIA
Two takeaways: coal generation was hurt by the severe price drop in natural gas in 2012, and coal prices are extremely stable. So as long as the price in natural gas continues to climb investors can have confidence that coal will continue to fight back into the nation's energy supply. That is good news for coal-heavy companies such as Duke Energy, Southern Company (SO -0.49%), and Dominion Resources (D -2.02%).
|
Coal % |
Natural Gas % |
Total Capacity | |
|---|---|---|---|
|
Duke |
46% |
17% |
57,700 MW |
|
Southern |
38% |
42% |
45,740 MW |
|
Dominion |
22% |
17% |
27,500 MW |
Source: Company SEC filings
It is worth noting that natural gas will still likely be cheaper than coal due to efficiency and relative cleanliness. For instance, Southern notes that fuel costs per net kilowatt hour in 2011 were 4.02 cents for coal and 3.89 cents for natural gas -- despite the large difference in price per Btu reported above. That gap widened considerably last year to 3.96 cents for coal and 2.86 cents for natural gas, but it should close in the years to come. Just don't think coal is anywhere near snuffing out its new rival hailing from the shale fields.
Foolish bottom line
At the end of the day the rise in natural gas prices will likely only slow its eventual ascension to the top spot as a fuel source. Gas turbines are becoming increasingly more efficient and gas-fired plants do not require costly scrubbers. But the closing of the gap makes it much easier for Duke Energy to supply spot markets with coal generation, even if most power generation is allotted to long-term supply contracts. It should also alleviate pressure on management to make "the switch". That being said I think that this trend definitely has the potential to push shares higher. Until the market catches on investors can sit back and enjoy a 4.5% dividend.
