Coal is one of the most plentiful and least expensive sources of energy on Earth. That's the good news. The bad news is that it's dirty compared to other fuel options like increasingly popular natural gas and renewables. That's why coal's image is so bad right now. Utilities, however, also consider price when making fuel choices, so the cleanest fuels don't always win the day.

This is why coal use was up about 5% in June, year over year, and natural gas use was down around 16%, according to the Energy Information Administration or EIA. As Cloud Peak Energy (CLD) noted in its second quarter earnings release, "...natural gas prices have remained at a level where most plants consuming PRB coal are economically able to dispatch coal."

To provide a comparison, the EIA notes that it cost utilities about $3.93 per million Btu (mmBtu) to burn Henry Hub natural gas in June. Coal giant Peabody Energy (BTU) estimates that Powder River Basin (PRB) coal is competitive with gas priced in the $2.50 to $2.75 per mmBtu range. Illinois Basin (ILB) coal can compete with natural gas in the slightly higher $3.25 to $3.50 per mmBtu range. With natural gas in the $4 area, both PRB and ILB coal are competitive today.

Peabody Energy has notable exposure to both regions, but Australian operations account for nearly half of its revenues. Moreover, metallurgical coal, which is used in steel making, is a big part of its business, too. So, Peabody is a great diversified coal miner, but it doesn't allow more aggressive investors to home in on the two "sweet spots" in U.S. thermal coal.

Since U.S. thermal coal is the area that's most likely to see demand start to pick up in 2014, more aggressive investors should look at either Cloud Peak or Alliance Resource Partners (ARLP 0.42%).

Focused on cheap coal
Cloud Peak is focused almost exclusively on the PRB area. That puts the company in prime position to benefit as long as natural gas prices stay around where they are now. That said, utilities have been burning down their coal stockpiles instead of ordering new coal, so Cloud Peak is expecting coal volumes to be flat year over year in 2013. Add in lower coal prices, and this year is destined to be a difficult one even if demand picks up from here.

Next year, though, should see much easier earnings comparisons as the coal market stabilizes. And, Cloud Peak has been increasingly focused on the export market. Coal exports, which totaled less than a million tons in 2008, are expected to reach the five million ton level this year. While that's only about 5% of the company's expected output, coal fired power generation in Asia is expected to increase over 60% by 2025 .

That makes Cloud Peak a play on both the recovering U.S. thermal coal market and an emerging play on growing Asian coal demand.

A star performer
The ILB, meanwhile, accounted for over 80% of the coal that Alliance Resource Partners mined in 2012, making it a focused investment on that region. Interestingly, however, while other coal miners have been cutting back production and shutting mines, Alliance has been able to increase its production. For example, in the first half the partnership sold about 19.5 million tons of coal compared to 16.5 million in the first six months of 2012.

That increase allowed the partnership to post record sales despite the year over year drop in coal prices. Management noted in the second quarter earnings release that, "The strong performance of our Illinois Basin operations through the first half of 2013 is expected to continue over the balance of the year." So, 2013 should be a record year for the company.

And Alliance rewarded unitholders with another quarterly distribution increase, the 21st consecutive hike. While other coal miners have struggled, Alliance has been a star performer. Although this limits capital appreciation potential, since the units have already rebounded from their lows, the around 5.9% distribution yield, regular distribution hikes, and modest capital appreciation potential should be an enticing combination to just about any investor.

Sticking to home
Coal is in the doldrums, but the foundation for a recovery appears to be building. Widely diversified miner Peabody Energy is an industry favorite because of its exposure across coal types, customer types, coal regions, and the global nature of its operations. This diversification, however, will limit the lift from improving U.S. thermal coal markets.

Cloud Peak and Alliance, however, are both tightly focused on the two most competitive domestic coal regions. Cloud Peak is the riskier of the pair, since results have been weak. That said, it's focused on the PRB, the cheapest U.S. coal region. Alliance, though lacking recovery appeal, continues to perform well above industry levels, offers a near 6% yield, and has a history of regular distribution increases. That's an alluring combination even if the units only offer modest appreciation potential on improved ILB coal pricing.