Russia Continues to Play the Natural Gas Card

To say that Russia and Ukraine have a tense relationship is an understatement. Russia's annexation of Crimea, of course, has flared the flames. Since about 15% of Europe's gas goes through Ukraine, it's not surprising to see European nations rethink their commitment to politically uncertain natural gas. Maybe, just maybe, coal isn't such a bad thing after all...

This is the Russia I remember!
When I was growing up, Russia was the proverbial "bad guy." Movies, television shows, and books all fell back on the Cold War baddie image. Of course back then it was all about nuclear holocaust and espionage. Today, Russia's tough guy image is more blatant—it has vast energy resources that Europe needs and it's willing to use that as leverage to get what it wants.

The recent threats by government-controlled Gazprom (NASDAQOTH: OGZPY  ) to shut down the flow of gas to Ukraine are just the most recent example. In fact, Russia did the same thing back in 2009. Without passing judgment on who's right and who's wrong politically, this shows why owning shares in a government-controlled entity can be so risky.

Source: EIA

Gazprom gets about 50% of its revenues from Europe. Cutting off a vital artery to that market is bad business regardless of the political implications. Sadly, Europe is a market Gazprom should actually be nurturing.

In fact management recently highlighted the many European positives, at least for Gazprom: "decrease of indigenous gas production in Europe," "no success in shale gas developments," "slow down of nuclear energy development," "increase of gas consumption in transportation sector," and "new sectors of gas consumption." Why make waves? Because the government told it to.

Let's use more coal?
The Ukraine/Russia tension is why Ukraine has openly discussed falling back on coal (aside from the fact that it may have no choice). So, too, has Poland. Of course Poland gets about 90% of its electricity from coal now, so Polish Prime Minister Donald Tusk appears to be using Russia's tussle with Ukraine as political cover for sticking with a fuel that environmentalists hate.

That said, Germany has been shifting toward coal, too. This is because of the government's decision to exit nuclear power and because poorly structured policies supporting renewable fuels have actually made coal more competitive in some European markets. But the government can't be too upset about that shift in light of Crimea.

In fact, Kevin Crutchfield, CEO of Alpha Natural Resources (NYSE: ANR  ) , noted during his company's first quarter conference call, "major European economies specifically Germany and the UK increased their thermal coal imports by a robust 13% for the first two months of 2014." And, he expects coal to benefit from "an increasing desire to [lessen] reliance on Russian coal and natural gas."

ANR Chart

ANR data by YCharts

Alpha Natural Resources just opened a sales office in London, and Europe is just a short boat ride away from the East Coast. Eastern thermal coal accounts for about 40% of Alpha's top line. That's been a rough business over the last few years as relatively low U.S. natural gas prices have led domestic utilities to switch to gas. Russian saber rattling, however, could turn that liability into a long-term asset, even if U.S. utilities continue to favor gas.

Coal becomes a less dirty word
Alpha Natural Resources' first quarter was rough, with a $0.25 a share loss dragging the losing streak to 10 consecutive quarters. It's hard to like a company with a track record like that. However, the same political issues that could throw a wrench into Gazprom's business are shifting the energy landscape back toward coal.

It won't be an overnight switch, but Alpha's Crutchfield is "cautiously optimistic on the outlook for the coal market in the back half of 2014 and moving into 2015." And Russia is just one of the many reasons why beaten-down Alpha shares could be a good way to benefit from a burgeoning coal upturn, though the light at the end of the tunnel is still a ways down the road.

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