Is Coal on the Verge of a Comeback?

After years of headwinds, the coal industry may finally catch a break now that natural gas prices have risen sharply.

Mar 25, 2014 at 9:38AM

Coal has been under intense pressure for the past several years, from a variety of sources. Increasing public scrutiny about the environmental and public health effects of coal mining and rising political intolerance of building new coal-fired plants have dealt a severe blow to the coal industry. And, relatively low natural gas prices over the last two years resulted in increased demand for natural gas that prompted some utility customers to switch from coal to natural gas.

But just before you write off coal as dead and buried, it sees a comeback may be taking place. Coal miners are once again seeing some moderation in demand, primarily due to the rally in natural gas prices in just the past few months. And, after several quarters of horrible earnings reports, some publicly traded coal companies actually see a light at the end of the tunnel.

Coal needs any good news it can get its hands on
A rise in demand for coal couldn't come at a better time. Major coal producers across the board have taken it on the chin over the past year. Peabody Energy (NYSE:BTU) saw its earnings before interest, taxes, depreciation, and amortization (EBITDA) collapse by almost half last year. Poor pricing was a major contributor behind Peabody's EBITDA getting slashed by $800 million in 2013. Peabody struggled to keep costs down, like a lot of other coal producers last year, which also contributed to its falling margins.

Likewise, CONSOL Energy (NYSE:CNX) was able to keep production relatively steady last year, but rising costs took a severe bite out of its bottom line. Its average costs rose 2% last year, and when you combine that with the fact that its average realized sales price fell by 12% to $75 per ton, it's no surprise CONSOL wasn't able to keep profits up.

Look underneath the surface for signs of coal's recovery
In recent months, earnings reports out of coal producers themselves only confirmed what we already knew, that 2013 was a very bad year for coal companies. But, in the reports coming out of end users of coal, there are some leading indicators that may signal a turnaround in the months ahead.

From this perspective, it's not all bad news for coal. Some industrial users are showing signs that coal demand might finally stabilize. Rail freight operator Union Pacific (NYSE:UNP) reported just a 1% dip in coal freight revenue in the fourth quarter, and actually grew its coal revenue by 2% in the previous quarter.

And, even utilities are back to growing their coal usage.Utility giant Southern Company (NYSE:SO) produced 42% of its energy from gas last year, along with 38% from coal. This actually represented a boost in coal usage from the previous year. Southern Company generated 45% of its energy from gas and 36% from coal in 2012.

Why coal companies may soon see glimmers of hope
After years of punishing industry headwinds that included increasing government scrutiny of coal-burning plants and relatively low natural gas prices, coal could soon have the wind at its back. The extremely harsh winter the United States just went through has reminded utilities of the value of their coal fleets. That, in addition, to a sudden and sharp rally in natural gas prices, makes coal look surprisingly attractive for industrial end-users.

Where coal goes from here and whether its comeback is for real is uncertain, but the coal companies that kept production steady throughout the downturn may soon be rewarded for their efforts. If natural gas prices continue to rally, utilities remain incentivized to keep returning to coal to a greater extent.

Coal is by no means thriving. It's true that an abundant supply of cheap natural gas prompted utilities to switch from coal to natural gas last year. And, continued building of coal-fired power plants seems unlikely, with rising political scrutiny of coal. At the same time, the reality is that coal is very much a part of U.S. power generation. Predictions of coal's demise seem to be greatly exaggerated.

You might not own coal forever, but these companies might qualify

3 stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers