Coal Was in Trouble Long Before the New Carbon Dioxide Rules

Coal's demise has been going on for years, and the EPA's new rules limiting carbon dioxide emissions are only a small part of the story.

Jun 3, 2014 at 12:05PM

If the closure of hundreds of coal plants and improved economics for natural gas and renewable energy weren't enough, the Environmental Protection Agency may be putting a final dagger in the U.S. coal industry by instituting a nationwide reduction in carbon dioxide emissions. In rules released yesterday, the EPA is outlining a goal to reduce carbon dioxide emissions 25% by 2020, and 30% by 2030 from 2005 levels.

It's not much of a stretch goal considering that CO2 emissions from electricity generating plants were down 16% from 2005 to 2012. But it's not a good sign for the companies supplying coal for some of the plants that will be targets for shutdown in the future.  

Coal stocks were already in trouble
Suppliers of coal have had a spectacular fall over the last three years with some falling over 90% from their peak. Arch Coal (NYSE:ACI), Peabody Energy (NYSE:BTU), and Alpha Natural Resources (NYSE:ANR) epitomize what's going on in the industry.

ACI Chart

ACI data by YCharts.

The problem has been a broad decline in demand due to hundreds of coal power plants being shut down around the country. In fact, it was really an abundance of low-cost natural gas that put pressure on these plants more than anything, and these new regulations don't help.

The result has been billions of dollars in losses for Arch Coal, Peabody, and Alpha Natural Resources. So, no matter what you hear about yesterday's EPA rules, the writing was on the wall for coal long before yesterday.

ACI Net Income (TTM) Chart

ACI Net Income (TTM) data by YCharts.

The writing was on the wall
This doesn't come as much of a surprise for those following the coal industry. I've been writing about how bad the future of coal is for years, and companies have been shutting down mines and going bankrupt around the country.

Sure, you can point to a positive sign here or there, but the long-term trend is that coal's time dominating U.S. energy is over. There are cleaner, cheaper alternatives that will take its place, and the EPA's ruling was just a piece of that demise.

Dominion Coal Plant Wiki Image

A Dominion coal plant in Virginia. Image source: Edbrown05 at Wikimedia.

China isn't the savior
It's only a matter of time before U.S. coal demand slowly dries up, and some will say that China will fill the gap. But that's misreading the country's long-term future. China is looking to limit imports of some high ash and sulfur coal, and overall imports are expected to be down in 2014.  

China has never liked importing anything, much less energy, and with the country covered in smog, China has actually become the world's biggest installer of wind and solar power. It's those energy sources, not coal, where China wants its future to be.

What will you be left with at the end?
So, why would you buy coal stocks today? Arch Coal ended last quarter with $5.1 billion in debt, Peabody had $6.0 billion in debt, and Alpha Natural had $3.4 billion.

If losses continue to mount, which they likely will, investors have to keep in mind that debtholders have first dibs on any future cash flow. Eventually, debt has to be paid back, and if debt markets aren't willing to offer more debt, the result is bankruptcy. Patriot Coal found that out the hard way, and I won't be surprised if another coal miner or two meet the same fate before the decade is out.

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Travis Hoium 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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