Coal Was in Trouble Long Before the New Carbon Dioxide Rules

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.

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.

A better bet for the future of energy
You already know record oil and natural production is changing the lives of millions of Americans now that coal is on the way out. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2980586, ~/Articles/ArticleHandler.aspx, 9/21/2014 10:22:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement