Why Investors Should Be Encouraged By the Outlook for Coal

New coal-firing techniques, and rising natural gas prices, mean coal might finally stage a comeback in 2014.

Jan 19, 2014 at 3:07PM

The past few years have seen a severe deterioration of the coal industry, as it nearly drowned under the weight of several overhanging factors. First, more restrictive environmental protection standards have made it very difficult to build new coal-fired plants in the United States. In addition, booming natural gas production has served to undercut coal.

As demand for natural gas rises in the United States, the price of natural gas is starting to increase in tandem. This may finally ease the pain for coal producers, whose end-users are now incentivized to once again return to coal. That's why, at least in the short term, coal is likely to see a rebound.

Evidence that coal's decline is leveling off
Fortunately for coal companies, there's already evidence suggesting a slight recovery in coal. In fact, the U.S. Energy Information Administration expects coal production to increase by 3.6% in 2014, following a 9% production decline from 2011 to 2013, and cites higher natural gas prices as the primary reason.

While shipment volumes to industrial end-users remain in decline, the nation's railroads are beginning to see some signs of stabilization in the coal market. For example, even though its coal volumes remain challenged, Union Pacific (NYSE:UNP) grew its coal freight revenues by 2% in both the most recent quarter as well as through the first nine months of the year. The fact that railroads like Union Pacific are seeing coal revenues increase signals at least some measurable improvement.

Will utilities return to coal?
As previously stated, it's extremely difficult for utilities to build new coal-firing plants, due to increasing regulatory scrutiny. However, some utilities, including Southern Company (NYSE:SO), are devoting billions to research new coal-processing technologies that may result in a promising future for coal after all.

Southern Company considers its Kemper facility to be the future of coal. It employs a revolutionary technology that utilizes lignite coal, which converts to gas at a much lower cost than traditional gasification techniques. It's a much more environmentally friendly process as well, and the facility is expected to become operational by the end of the year.

A spectacular coal MLP to capitalize on the recovery
Alliance Resource Partners (NASDAQ:ARLP) stands atop the list of coal companies in the United States, thanks to its extremely advantageous cost structure. It produces primarily Illinois Basin and Northern Appalachian coal, which are low-cost sources that compete very well with natural gas on pricing.

This is what has allowed Alliance Resource Partners to keep increasing coal production, and profits, even during the difficult environment afflicting the entire industry. This is illustrated by the fact that the company has realized 12 consecutive years of record results in terms of tons produced and sold.

Alliance Resource Partners is the first and largest master limited partnership that engages in the production and marketing of coal. As an MLP, it's required to transfer the bulk of its cash flow through to investors as a distribution. Amazingly, Alliance Resource has raised its distribution for 22 quarters in a row, and yields 6% at its recent unit price.

If natural gas prices keep rallying, coal should be a winner
As it's often been reported, the United States is sitting on an ocean of natural gas supply that is now commercially viable thanks to new, advanced drilling techniques. Depressed prices in recent years have only accelerated natural gas' momentum. Of course, once demand catches up, the price of natural gas is likely to catch up. This should actually work in coal's favor, and is already happening as natural gas prices have risen steadily in recent months.

If natural prices keep going up, utilities will once again consider returning to coal. And, since utilities like Southern Company are developing cleaner-burning coal technologies, the future for coal may be bright after all.

Position yourself for higher natural gas prices
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Bob Ciura owns shares of Alliance Resource Partners, L.P.. The Motley Fool recommends Alliance Resource Partners, L.P. and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

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I love the exercise, because it makes you think about what's important and forces you to be succinct.

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