BHP Billiton Is Bullish on Coal Long Term...If It Matters

While BHP Billiton continues to forecast a strong future for coal, the question remains whether the domestic producers can thrive until prices increase in the future.

Apr 7, 2014 at 1:17PM

More signs continue to emerge that coal has a much brighter future than most in the U.S. understand. Most recently, the coal head of BHP Billiton (NYSE:BHP) forecast a robust demand future for the commodity. Most importantly, the executive forecasts that future growth will come outside China.

BHP Billiton is a massive global miner, with operations in iron ore, copper, and petroleum more important to earnings than coal. The news, though, could have bullish implications for Peabody Energy (NYSE:BTU) and Alpha Natural Resources (NYSE:ANR), which are focused on coal.

The biggest fear for investors remains that the long-term benefits have companies like BHP Billiton continuing to produce large volumes of the commodity. All the while, domestic producers like Alpha Natural Resources are having a hard time bridging the current struggles to reach the long-term benefits.

Global miner
The problem with investing in BHP Billiton is that stock returns are based more on a global economic recovery and primarily one based on strong Chinese demand. Any particular commodity has limited direct impact on the stock, particularly in the case of coal.

Despite the impact of coal on the financials, BHP Billiton has one of the better views of the commodity, with 20 coal operations spread across five countries. Last year, the company produced 154 million tons of coal from those mines.

For the last six months of 2013, coal accounted for a little less than 15% of revenue and 5% of earnings before interest and taxes. Revenue totaled $4.7 billion for the period, making it a substantial operation. But the totals far trail iron ore, copper, and petroleum, which all exceeded $7 billion in revenue for the six-month period.

BHP operations sum up some of the structural issues with coal. For the second half of 2013, the company increased metallurgical coal production to a record 22 million tons, while thermal coal matched the results of the prior year -- not exactly the production numbers one would expect with prices at multi-year lows.

Coal prices
Despite the long-term growth potential of coal, the short-term pricing issues are killing the stocks. According to The Wall Street Journal, thermal coal prices in Australia are trading near their lowest level since 2009, and metallurgical coal prices are near a seven-year low. The question is whether these extremely low prices will lead to a rebound in the sector. In the U.S., the natural gas market has already seen what happens to inventory levels when prices hit extreme lows.

These low coal prices in Australia greatly impact the domestic producers with the global nature of the commodity. Naturally, Peabody Energy is affected greatly with a substantial operation in Australia. More importantly, Alpha Natural Resources was designed to benefit from coal exports to Europe and Asia with the East Coast facilities it built and acquired via the Massey Energy merger.

Consequently, both stocks continue to trade near multi-year lows, while BHP is holding up better with a more diversified commodity operation. More importantly, BHP and Peabody Energy have profitable businesses to survive until the coal sector turns around. Alpha Natural Resources faces the greatest risk, with the company still generating substantial losses.

Bottom line
The BHP Billiton news might suggest good times ahead for coal miners. But these stocks are likely to continue sitting at lows for a while considering the most important news was the suggestion that coal prices would remain low for more than a year. Clearly, the coal operations for BHP don't move the needle, so the best way to play the long-term coal demand is Peabody Energy and Alpha Natural Resources. But first companies like BHP need to quit producing record volumes.

3 stock picks for America's energy future
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 look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Mark Holder and Stone Fox Capital clients own shares in Alpha Natural Resources. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers