2014 May Be Coal's Last Dance

The stock market is as dynamic as the world it efficiently models. Each market dances with the other within limited degrees of separation. If prices for natural gas go up, the demand for coal goes up, and companies that transport coal will benefit. Indeed, according to the U.S. Energy Information Administration coal receipts are up at power plants and barges that suffered last year may be in for an increase in earnings this year, especially those that can transport liquid petrochemicals such as liquefied natural gas.

On Monday, the Obama administration authorized additional LNG exports from a proposed Oregon terminal. Many think the timing of the approval is highly political and connected to the Ukraine crisis. Either way, there's much evidence to show that in the long term, demand for LNG is growing while the demand for coal is slowing.

But in the short term coal may have one last burst of "energy." The EIA also published a report showing a drop in the number of "days of burn," which is used as a gauge for both inventory levels and, to a large extent, anticipated consumption of coal. That metric fell below 60 days for the first time since 2011, which is a sign that coal consumption could increase this quarter.

Indeed, coal consumption by utility companies is up, despite environmental campaigns, due to an increase in the price of natural gas prices. And as inventory levels start to catch up with demand, coal is regaining market share from natural gas. Additionally, high inventories of coal were drawn down by utility companies in 2012/2013 and new coal purchases were generally lower than average throughout 2013. The end result is low inventory coming into 2014 and an increase in demand, even if the demand will only be short term in nature. This is further illustrated by the graph below, which shows an increase in the percent of coal purchased on the spot market.

Source: EIA

Most coal used by electric generators is purchased under contracts that last for years. In exchange for a set price, the contracts deliver a set amount of coal. The spot market allows generators to replace expiring contracts with shorter-term supplies. The graph shows that the percent of coal receipts purchased on spot contracts has been on the rise since late 2012.

Largely affected by the coal trade is the barge industry. If coal receipts are up at power plants, it presents an opportunity for transportation, especially barges -- or at least it should. American Electric Power Company  (NYSE: AEP  ) and Archer Daniels Midland Company (NYSE: ADM  ) have enormous fleets, but they're a small part of the overall operation. Kirby Corp.  (NYSE: KEX  ) , on the other hand, is one of the only pure-play public companies in the industry. The economic moat for these large players is built on a mature industry with self-imposed standards, regulatory compliance, and an incredibly high cost of equipment. According to a recent article in National Geographic, the cost to super-cool natural gas into liquid form can cost as much as $10 billion, which is only a third of the total cost to build an export facility.

Archer Daniels Midland reported flat earnings in transportation for the fourth quarter of 2013. However, sales for the core business were down.

American Electric Power, one of the largest electric utilities in the U.S., owns AEP River Operations, which purchased 20 liquid barges that started transporting liquids on February 20. AEP River Operations is one of the largest barge companies in the country with a fleet of more than 79 towboats and more than 2,900 hopper barges. While operating earnings declined for American Electric Power as a whole, operating earnings for AEP River Operations increased almost 600%.

With a one-year price return of 31%, Kirby Corp. is the nation's largest domestic tank barge operator of bulk liquid products through the Mississippi River System, making it ideally suited for the transport of liquid petrochemicals.

Takeaway
Barges move commodities on water-management systems that we laypeople call rivers. The more they move, the more profit they make. In many respects, 2014 may be coal's last dance, as LNG has become the pretty girl and companies like AEP River Operations and Kirby Corp. are prepared. The EIA forecasts the demand for coal to go down in 2015, which gives those barges with large exposure to coal a little time to either set up export relationships or more LNG contracts. Those shipping companies with a heavy reliance on coal for future revenues will make a good short candidate in 2015.

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