If You Can Read This, You Won't See the End of Coal

While we in the U.S. can easily adopt the impression that coal is rapidly on the way out, a more detailed look at its use in other countries tells another story. The real question, then, is the extent to which the carbon that results from its burning can be captured and stored underground for perhaps centuries to come.

David Smith
David Smith
Apr 2, 2014 at 1:20PM
Energy, Materials, and Utilities

Maybe coal is considered a compelling subject for discussion as we move into spring and increasingly concern ourselves with the quality of our outdoor world. Or perhaps it's purely coincidence. Whatever the reason, my newly arrived April issues of both National Geographic and Wired include lengthy articles about the controversial black fuel, its future role on our planet, and whether the carbon that it produces can be effectively captured and stored below ground.

The two pieces devote considerable attention to the effects of coal as a predominant fuel in China. They also indicate that, regardless of the current plight of the U.S. coal companies, along with the increasing substitution of cleaner-burning natural gas in many of our nation's power plants, coal is here to stay.

Three names to scan
On that basis -- and I'll be more specific momentarily -- my investing interest in such major producers as Peabody Energy Corp. (NYSE:BTU) and CONSOL Energy (NYSE:CNX) has been tweaked. To that pair, I'd add BHP Billiton (NYSE:BHP), the Australian mining and petroleum behemoth. As recently as Tuesday, the big company announced that it's giving consideration to paring its output to a handful of products, i.e., petroleum, iron ore, copper, coal, and possibly potash.

For now, it appears that the reality of coal is at the top of the docket for at least a few science and environmental writers. The metrics that they note in the process can be staggering. As author Charles C. Mann points out in his Wired article, more than three-fourths of China's electricity comes from coal. The country's use of the energy source essentially equals that of the rest of the world. (Although Poland's coal usage accounts for 86% of its electricity production.)

China, in particular, has a vested interest in reducing its coal-spawned air pollution. And that's just for starters. The International Energy Agency predicts that China will double its number of coal-fired power plants by 2040. However, that almost can't occur without major advancements in mankind's ability to capture and store underground the vast amounts of carbon and other particulates that are byproducts of burning coal. Indeed, Mann tells us that already about 1.2 million premature Chinese deaths annually are tied to outside air pollution.

Can we turn to wind and solar quickly?
The optimum solution obviously would be the immediate shuttering of the world's 7,000 coal-fired power facilities, of which about 600 are located in our country. They could then be replaced by a massive increase of power from renewables, such as wind and solar. But that probably won't happen during most of our lifetimes. In fact, former Secretary of Energy (and Nobel laureate) Steven Chu maintains that such widespread use of solar and wind can't occur before the end of the current century.

It's also worth noting that, barring major changes in some manufacturing processes, coal will never completely disappear. Without it, and given current technology, the production of steel, cement, and certain fertilizers would be impossible.

So what to do? Both authors -- the National Geographic article was authored by Michelle Nijhuis -- devote considerable attention to efforts being made to capture the carbon and carbon dioxide that are unleashed when coal is burned and to store it safely underground. Unfortunately, the methods being tried -- much of the experimentation is surprisingly occurring in China -- indicate that the process of carbon capture and storage (CCS) is prohibitively expensive. And, at least in the minds of some environmentalists, it's still insufficiently effective.

Three investment possibilities
It's clear, however, that, despite the implicit picture we may be getting in the U.S., coal is hardly being shunted aside as a major fuel source. That, of course, means that neither are the companies that produce it. It therefore seemingly becomes appropriate for fools who haven't completely ( and probably prematurely) written off the industry to double back and take a gander at the trio of aforementioned stocks.

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  • CONSOL draws attention because it's both a coal producer and increasingly a natural gas operator. While its shares are about 15% higher during the past two years (hardly making it a star performer), its 1.3 PEG ratio makes it worth attention, as does its average 2.0 (buy) rating from the analysts who follow it.
  • As to BHP, I'm somewhat eager to observe how its potential restructuring will unfold. From an initial perspective, the simplification makes sense, especially since it's unlikely that -- under its new management -- it finally isn't trying to buy every company not nailed down. It's 1.6 average analysts' rating places it nearly halfway between a buy and a strong buy.
  • I'm inclined to sit on my wallet and simply watch Peabody for now. While the analysts don't hate it (at 2.2), its PEG ratio is in the nosebleed section, and its shares many not have completed their slide.

The Foolish bottom line
Clearly, this group is not for the faint of heart. However, it's also not one that has sailed away, never to be seen again. I urge Fools to keep tabs on it.