Can High Gas Prices Lift Coal's Spirits?

Even though the headlines seem to be predicting the death of coal, rising natural gas prices are boosting the prospects of some key coal regions.

Jun 30, 2014 at 11:16AM

Don't look now, but domestic coal is ready for an uptick. At least that's what Joy Global (NYSE:JOY) seemed to be saying during its second-quarter conference call. That may sound ridiculous based on the recently proposed carbon dioxide rules, but the truth is U.S. thermal coal is actually in a good spot right now. Take a look at diversified coal miner Rhino Resource Partners (NYSE:RNO) to take advantage of the uptick.

What this supplier is seeing
Joy Global sells mining equipment, and the global coal industry is a big end market. U.S. thermal coal was one of the first coal regions to head south, but if Joy Global's CEO Ted Doheny is right, it's getting set to break out of that funk. And the big change is natural gas:

[W]e've talked a while about what's happening with natural gas. With natural gas coming a little bit below $5, it puts various basins in play.

(Source: Joy Global, via Wikimedia Commons)

In the Powder River Basin (PRB), which is one of the lowest cost coal regions in the country, Joy Global is seeing "fairly strong activity on the service side." There's also been more activity in the Illinois Basin (ILB), which is another relatively cheap coal region. In fact, Joy Global increased its "longwall presence" in the ILB, according to Doheny.

These two regions are competitive, with natural gas priced much lower than it is today. The southern region of the PRB, for example, can compete with gas priced as low as $2.50. The ILB, meanwhile, can compete with natural gas in the $3.50 to $3.75 range. Look for these two regions to do relatively well as utilities shift toward the lowest-cost fuel options.

However, the good news doesn't end there. Joy Global's Doheny noted, "[W]e've seen activity in Northern App and we feel pretty good about that, and that's also showing up on service business." Northern Appalachia (NAPP) is more expensive to mine than the PRB or ILB, but it starts to get competitive when gas is in the $4.50 range. So even NAPP coal could see solid demand.

You can't play them all
There's no miner that is perfectly positioned in each of these favorable markets. However, small but broadly diversified Rhino Resource Partners is a solid option. For starters, this limited partnership sports a yield of more than 13%. So you are getting paid very well today for taking on the headline risks in the coal market.

And while those risks, including changing environmental regulations, are quite real, Rhino has an interesting balance sheet. There's virtually no debt. Last year it sold a collection of natural gas assets and used the proceeds to essentially eliminate any threat of being over-leveraged. This should allow the miner to coast through this downturn while others are struggling to survive.

(Source: ReubenGBrewer, via Wikimedia Commons)

The big news, however, is that Rhino Resource Partners is opening a new mine in the Illinois Basin that could materially alter its long-term prospects. And most of the costs of opening that mine have already been paid. The mine already has a customer for 800,000 tons a year but has the potential to produce as much as 2 million tons.

In addition to 144 million tons of ILB reserves, Rhino has another 80 million tons of reserves in NAPP. And while its Western operations aren't in the PRB, Rhino Resource Partners was able to sell its Western coal for $40 per ton in 2013, about $7 per ton more than its mining costs there. These three regions together account for roughly 55% of the partnership's reserves.

Calling the upturn
So it looks like Joy Global is actually calling an upturn in U.S. thermal coal. Although there's no investment option that hits all the right coal basins, high-yielding Rhino Resource Partners is in two. And its ILB exposure could turn into a major bright spot as the new mine comes online. It's important to keep an eye on changing environmental regulations, but don't let the news fool you into believing that coal is dead -- it isn't.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Reuben Brewer has a position Rhino 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

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, 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