Coal stocks have been under constant pressure since the financial crisis. Most are trading at a fraction of pre-crisis value which has some investors wondering if the value of these stocks has plunged too far, making now a good time to invest in a rebound in coal. As you can see from the chart below, the performance has been absolutely abysmal:
If that chart has you seeing opportunity instead of failure then I have good news for you. Among the group, I see two coal stocks with business models that set them apart from the group and give them an edge. If you are looking to invest in coal, these are the two stocks worth digging into if you want to play the future rebound of coal.
The global pure-play: Peabody Energy (NYSE:BTU)
With a leading presence in Australia, the southern Powder River Basin and the Illinois Basin, Peabody has the best assets to access the world export markets. That's vitally important because while coal might not be all that popular here in the U.S., Pacific Rim markets such as India and China are expected to import record coal volumes this year. Overall, seaborne thermal coal demand is likely to increase 50 million tonnes on growing Asian demand. The following slide really sums up coal demand from those two key Asian countries.
Peabody is ahead of its U.S.-based peers in tapping this demand. First, it acquired coal operations in Australia, which places it closer to its customers. In addition to that, it's been active in securing long-term export capacity in the U.S. Last year it signed a deal with Kinder Morgan Partners (NYSE:KMP) to increase its export capacity to more than 7 million tons of coal per year from Kinder Morgan's Houston terminal. Overall, Kinder Morgan is adding to its coal export capacity in Louisiana as well as considering a coal export terminal at its existing bulk facility in Charleston, S.C. The clear trend here is that access to export markets is important to coal producers.
Peabody isn't the only company with access to export markets. Arch Coal (NYSE:ACI) for example also has coal export deals with Kinder Morgan while Alpha Natural Resources (NYSE:ANR) has tremendous access to the export markets. The difference here is that all of Peabody's reserves are in the lower-cost Powder River and Illinois basins, while both Arch and Alpha have higher-cost Appalachian coal operations which cut into margins. That's why I think Peabody really has an advantage here because when you combine its low-cost coal reserves with its access to export markets, as well as its Australian coal operations, it has all the makings of a really good stock to invest in relative to these peers.
If you can't beat them, join them: CONSOL Energy (NYSE:CNX)
The reason why coal has been under so much pressure in the U.S. is that natural gas is pushing its way into coal's core electricity market. This is where CONSOL's diversification into natural gas gives it a leg up because it can benefit from increased natural gas demand by utilities. Because of current market conditions, CONSOL is all but abandoning its efforts to grow coal production in the future and instead will look to grow its gas business by double digits.
CONSOL is still a top-tier coal miner; it has some coal growth ahead thanks to its soon to be finished BMX Mine, which is expected to deliver 5 million tons of coal per year. Further, the company has access to export capacity through its 100%-owned Baltimore terminal which is undergoing an expansion of its capacity to 16 million tons. The bottom line here, and what makes CONSOL a good stock to invest in, is its balanced approach which, when combined with its strong balance sheet, really sets it apart.
Final Foolish thoughts
Of the two, I think Peabody is the company worth digging deeper into first as its Australian operations really give it a major competitive advantage. While I like that CONSOL is diversified, natural gas is also a pretty cheap commodity these days which doesn't help margins very much. Further, coal from Baltimore has a much longer journey ahead of it to reach Asia than does coal from Australia, which is a good reason to dig deeper into Peabody's stock as a potential investment.
Fool contributor Matt DiLallo 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.