Dow Treads Water as Oil Climbs, Coal Stocks Plunge

Oil futures rose $1 per barrel, but Alpha Natural Resources led coal stocks down sharply. Find out why.

Mar 7, 2014 at 3:30PM

The Dow Jones Industrials (DJINDICES:^DJI) played out a familiar pattern today, as early gains largely evaporated in the afternoon. As of 3:30 p.m. EST, the Dow was still up 17 points, but the broader market turned downward slightly as traders appeared reluctant to hold onto their positions going into the weekend. Focusing on the energy sector, markets were mixed, with April West Texas Intermediate crude oil prices climbing by $1.02 per barrel to $102.58, but April natural gas futures fell $0.04 to settle at $4.62. Among Dow stocks, ExxonMobil (NYSE:XOM) was the best performer among energy names, gaining 1.2%. But the laggard of the day came from the coal sector, where Alpha Natural Resources' (NYSE:ANR) decline of 11% caused most of its peers, including Peabody Energy (NYSE:BTU) and Arch Coal (NYSE:ACI), to fall sharply in sympathy.

The economics of energy
The energy markets have been even more turbulent than usual lately, as geopolitical concerns have added yet another element of uncertainty to the oil and natural gas industry. Over the past week, Exxon has seen its stock pounded by concerns about tepid production growth expectations for 2014, as well as fears about whether its business assets in Russia could be in jeopardy in the event of economic sanctions imposed by Western countries against nation.

Today's gain of 1% for the stock, however, reflects the reality that in the long run, Exxon has better opportunities for growth. With expectations of 2% to 4% production growth in liquids from 2015 to 2017, the company can use its vast economies of scale to make the most of its opportunities. Although Exxon faces the same challenges as its peers in dealing with higher costs to produce new oil and gas, current oil prices above $100 per barrel support far more projects than past lower prices did.

Coal slides
Meanwhile, coal stocks plunged as Alpha Natural's stock got downgraded by Goldman Sachs. With a new price target of just $4 per share, the Goldman analyst believes that metallurgical coal in particular will continue to face a low-price environment, and Alpha has company-specific challenges in dealing with its relatively high cost structure and its high levels of debt. Yet the specific nature of Goldman's comments didn't stop Peabody and Arch Coal from posting substantial losses as well, falling 5% and 4.5% respectively.

The question for coal is whether low natural gas prices have permanently shifted demand away from coal toward the cleaner-burning fuel. We should start to see an answer to that question shortly, as natural gas prices have climbed substantially. If users remain committed to natural gas despite higher prices, then it could prove disastrous for coal companies and their long-term prospects.

Find profits in energy
Even with coal under pressure, record oil and natural gas production has opened up great investment opportunities. To help you find them, 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. 

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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