The U.S. Energy Information Administration recently updated its long-term energy outlook, with an attention-grabbing headline of natural gas overtaking coal in the electricity market. Sounds like coal is a goner, but that's just not true. Read a little further and you'll find that coal will still account for about one-third of the energy pie in 2040. That's far from a death blow, but it does mean that some coal companies are better positioned for the future than others.
The big picture
There's no question that the big picture for domestic coal consumption is a slow fade. However, that's far from the same thing as death. It looks like coal will account for about 40% of U.S. electricity supply in 2013. So, in 26 years or so, coal will lose about seven or eight percentage points of the pie.
But don't think that means coal use falls. In fact, according to the EIA, the amount of coal used in 2040 is expected to be essentially unchanged from 2012. In other words, the energy pie gets bigger, but coal consumption doesn't change that much so coal's slice gets smaller. Developing markets, however, will likely see increased coal consumption. In fact, the EIA is calling for an increase in exports of nearly 30% by 2040. Not huge for such a long span but an important offset to stagnant U.S. demand.
Who's the big winner?
That begs the question of where to invest today for that potential future. Alliance Resource Partners (NASDAQ:ARLP) stands head and shoulders above the big coal players because it operates almost exclusively in the Illinois coal basin (ILB). According to the EIA, that's the one area of the country that will continue to see demand growth.
That's not a new phenomena, Alliance has been able to grow production and sales through coal's darkest days because utilities are already switching to ILB coal at the expense of other regions. As that trend continues, look for Alliance to keep posting record years -- something it has done for more than a decade. And with a 6%-plus yield, you are getting paid well for sticking around despite the negative coal headlines.
Another company to watch is Peabody Energy (NYSE:BTU). Peabody is the largest coal miner in the world, with operations in the U.S. and Australia. Domestically, the company operates out of the favored ILB and the ultra-cheap Powder River Basin. Although the EIA expects PRB demand to be stagnant or to decline, Peabody's size and global reach will give it a leg up on smaller players in the region.
And, while U.S. demand isn't going to grow, coal use will likely expand in key Asian markets like China and India. Peabody's Aussie operations already serve those markets, giving it key relationships that it can leverage to export U.S. coal. For example, it just inked a long-term deal to supply China with thermal coal.
And although the PRB market isn't expected to grow, Cloud Peak Energy (NYSE:CLD) is also worth watching. It operates exclusively out of the PRB but has been focusing on expanding its export business in Asia. Notably, the company is the largest U.S. player in South Korea and is trying to push its way into the Japanese market.
Although those two nations are mature, increased demand from China will likely make it harder for the entire region to secure access to coal. So Cloud Peak is making the right moves to ensure growth despite the potential of stagnant U.S. demand. That includes locking in future port access and the acquisition of new coal reserves. And if the miner can ink a deal with China, its export business would quickly ramp up.
Not the end
The easy headline from the latest EIA projection is that natural gas is a big winner. However, if you take the time to read a bit deeper, that doesn't make coal a big loser. It just means you need to be careful about which coal companies you own -- look at Alliance, Peabody, and Cloud Peak.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.. 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.