Natural Gas Is Trying, But It Just Can't Kill Coal...

The U.S. Energy Information Administration recently updated its long-term energy outlook, with an attention-grabbing headline of natural gas overtaking coal in the electricity market. Sounds like coal is a goner, but that's just not true. Read a little further and you'll find that coal will still account for about one-third of the energy pie in 2040. That's far from a death blow, but it does mean that some coal companies are better positioned for the future than others.

The big picture
There's no question that the big picture for domestic coal consumption is a slow fade. However, that's far from the same thing as death. It looks like coal will account for about 40% of U.S. electricity supply in 2013. So, in 26 years or so, coal will lose about seven or eight percentage points of the pie.

But don't think that means coal use falls. In fact, according to the EIA, the amount of coal used in 2040 is expected to be essentially unchanged from 2012. In other words, the energy pie gets bigger, but coal consumption doesn't change that much so coal's slice gets smaller. Developing markets, however, will likely see increased coal consumption. In fact, the EIA is calling for an increase in exports of nearly 30% by 2040. Not huge for such a long span but an important offset to stagnant U.S. demand.

Source: EIA 

Who's the big winner?
That begs the question of where to invest today for that potential future. Alliance Resource Partners (NASDAQ: ARLP  ) stands head and shoulders above the big coal players because it operates almost exclusively in the Illinois coal basin (ILB). According to the EIA, that's the one area of the country that will continue to see demand growth.

That's not a new phenomena, Alliance has been able to grow production and sales through coal's darkest days because utilities are already switching to ILB coal at the expense of other regions. As that trend continues, look for Alliance to keep posting record years -- something it has done for more than a decade. And with a 6%-plus yield, you are getting paid well for sticking around despite the negative coal headlines.

Other players?
Another company to watch is Peabody Energy (NYSE: BTU  ) . Peabody is the largest coal miner in the world, with operations in the U.S. and Australia. Domestically, the company operates out of the favored ILB and the ultra-cheap Powder River Basin. Although the EIA expects PRB demand to be stagnant or to decline, Peabody's size and global reach will give it a leg up on smaller players in the region.

And, while U.S. demand isn't going to grow, coal use will likely expand in key Asian markets like China and India. Peabody's Aussie operations already serve those markets, giving it key relationships that it can leverage to export U.S. coal. For example, it just inked a long-term deal to supply China with thermal coal.

And although the PRB market isn't expected to grow, Cloud Peak Energy (NYSE: CLD  ) is also worth watching. It operates exclusively out of the PRB but has been focusing on expanding its export business in Asia. Notably, the company is the largest U.S. player in South Korea and is trying to push its way into the Japanese market.

Although those two nations are mature, increased demand from China will likely make it harder for the entire region to secure access to coal. So Cloud Peak is making the right moves to ensure growth despite the potential of stagnant U.S. demand. That includes locking in future port access and the acquisition of new coal reserves. And if the miner can ink a deal with China, its export business would quickly ramp up.

Not the end
The easy headline from the latest EIA projection is that natural gas is a big winner. However, if you take the time to read a bit deeper, that doesn't make coal a big loser. It just means you need to be careful about which coal companies you own -- look at Alliance, Peabody, and Cloud Peak. 

Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2778838, ~/Articles/ArticleHandler.aspx, 9/19/2014 11:58:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,308.37 42.38 0.25%
S&P 500 2,012.76 1.40 0.07%
NASD 4,587.39 -6.03 -0.13%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/19/2014 11:41 AM
ARLP $47.58 Down -0.32 -0.66%
Alliance Resource… CAPS Rating: ****
BTU $13.46 Down -0.03 -0.22%
Peabody Energy Cor… CAPS Rating: ***
CLD $13.42 Up +0.06 +0.45%
Cloud Peak Energy CAPS Rating: *****

Advertisement