Some are calling it a "war on coal." Others suggest that coal is being permanently displaced by natural gas. Right now, however, Alliance Resource Partners (ARLP -0.05%) sees the issue as a function of price.
A new world order
When asked to comment on a drop in Alliance's committed coal sales over the next three years, management's answer was: "...it does not reflect the customer concerns with regulation or the war on coal concept that you mentioned... [Utilities are] not booking as much of their expected burn and trying to keep open some of their book and interest, not knowing exactly what gas prices are going to do."
Put another way, utilities don't want to be contractually locked into coal if burning gas is cheaper than burning coal. That's not a problem for Alliance, which operates out of the Illinois Basin (ILB), the second cheapest coal region in the country. ILB coal can remain competitive with natural gas as long as gas prices stay around the $3.50 level.
However, if Alliance is right and customers are watching prices more closely, sales are likely to be a little less certain. That's a big shift, however, and it could make quarter-to-quarter earnings more variable throughout the industry.
A tough mix
That's particularly true for a company like Alpha Natural Resources (NYSE: ANR), which gets about 45% of its revenues from its Eastern coal assets. Eastern steam coal makes up about half of the company's reserves. Not only is the Eastern U.S. seeing a disproportionate share of utility plant closures, but there's a demand shift toward ILB coal that's causing issues, as well.
In fact, several of Alpha Natural Resources best growth opportunities are in the Central Appalachian (CAPP) region. That's the area most affected by the shift toward ILB coal. So while Alliance is set to benefit from this shift, Alpha looks like it will be taking a hit.
Although Alpha's other assets are in the low cost Powder River Basin and met coal plays, the Eastern steam coal business is a notable concern. Changing buying patterns, on top of shifting coal basin allegiances, could make Alpha's business increasingly unpredictable.
Diversity
At the end of the day, diversification could play an important role in coal. Alpha has operations on both U.S. coasts and a big export business. But the miner's eastern assets will be hard to offset. Peabody Energy (BTU), however, takes diversification to a new level.
For starters, it is one of the biggest players in the ultra-cheap Powder River Basin, which can compete with gas prices as low as $2.50. It also has a big stake in the ILB. So Peabody is in two of the best coal basins in the U.S. market. However, the company also has notable operations in Australia.
That foreign operation provides thermal and metallurgical coal to Asia. Although Alpha's met coal goes to a similar list of customers, Peabody's Aussie operations have a geographic benefit that Alpha can't match. And, recently, the weak Australian dollar has put U.S. coal at a competitive disadvantage—and allowed Peabody to boost sales at the expense of miners like Alpha.
While the pendulum could easily swing back in favor of Alpha on the export front, Peabody's large and well located U.S. businesses will act as a counterweight; just as Australia is doing now while U.S. operations lag. And that diversification should make shifting domestic buying patterns less of a concern.
Worth a little digging
Alliance Resource Partners is clearly well positioned for the buying pattern shift that it sees taking shape. Meanwhile, Alpha Natural Resources appears to be poorly positioned for the trend, though its diversification will help a little. However, Peabody Energy is well positioned domestically for such changes and has the benefit of global diversification. If a sharp shooting Alliance isn't to your liking, shotgun-like Peabody is probably a better option than Alpha.
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