Russia's Invasion of Ukraine Shows the Value of a Shunned Investment

With Russia playing hard ball on natural gas prices with Ukraine, the country is looking to make more use of coal—it may not be alone in that decision.

Reuben Gregg Brewer
Reuben Gregg Brewer
Apr 20, 2014 at 2:15PM
Energy, Materials, and Utilities

Russia's takeover of Crimea has had implications throughout the energy space. Now Ukraine, facing higher natural gas prices, is talking about coal. Since Russia supplies about 30% of Europe's natural gas, the country may not be alone in that decision—that's good news for East Coast coal players like Alpha Natural Resources (NASDAQOTH:ANRZQ), Alliance Resource Partners (NASDAQ:ARLP), and CONSOL Energy (NYSE:CNX).

Russian natural gas accounts for about half of Ukraine's usage. That makes Ukraine hugely dependent on Russia at a time when the two have a tense relationship. And Russia hasn't shied away from playing the gas card, cutting supplies briefly in 2009 and hiking prices more recently. This is what led Energy Minister Yuriy Prodan to explain at a Ukrainian cabinet meeting that, "We are now reviewing our electricity and fuel balance for 2014 with a view of using as much domestic coal as possible at the expense of natural gas."

With 30% of their gas coming from Russia, our European allies have a real issue on their hands, too. It wouldn't be surprising to see them reconsider coal as a strategic fuel source.

West Coast/East Coast
That would be music the ears of domestic East Coast miners. The big story for years has been demand out of Asia, which is largely served by miners closer to the Pacific Ocean. If Europe picks up the coal mantle, that could lead to a pickup on the Atlantic Ocean side of the country.

One of the best positioned could be CONSOL Energy, which recently sold around half of its coal business so it could refocus around, somewhat ironically, natural gas drilling. However, CONSOL Energy's move could prove prescient. The company sold off its most expensive mines and kept its lowest cost and most efficient mines just as domestic demand for thermal coal has picked up. In fact, the company recently increased its 2014 coal production target by about a million tons -- approximately 3% -- because of thermal demand.

Thankfully, CONSOL Energy also chose to keep its Baltimore Terminal. This means that CONSOL has low cost coal and access to export facilities if the "Old World" comes looking for politically secure energy supplies. And since CONSOL isn't the only one shipping out of the Baltimore Terminal, it can benefit from other companies selling to Europe, too.

Another winner could be Alpha Natural Resources, which gets about 40% of its sales from Eastern thermal coal. The company recently opened a sales office in London, England. According to Alpha Natural Resources, its, "...objectives in the European market include increasing customer regard for the quality, reliability and dependability of the company's thermal coals and unsurpassed U.S. export capabilities."

(Source: ВО Свобода, via Wikimedia Commons)

With Russia saber rattling over natural gas, Alpha Natural Resources' "dependability" goes well beyond just the quality and value of coal. The company's sales pitch can now include the fact that Alpha Natural Resources operates out of the United States, a politically safe ally.

Good either way
One other miner that wouldn't mind seeing increased foreign demand for thermal coal is Alliance Resource Partners. Unlike CONSOL and Alpha Natural Resources, however, Alliance Resource Partners has been posting record results despite the domestic coal market downturn. Management expects 2014 to be the fourteenth consecutive record year. That said, the top line is only expected to be flat-to-up about 4%, reflecting the continued malaise of the coal market.

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With domestic utilities increasingly switching to Illinois Basin coal, Alliance Natural Resource's specialty, the miner doesn't need European sales to make that happen. However, eventually, the coal basin switch will end and Alliance Natural Resource's growth will slow. That would make increasing demand from Europe a nice bonus.

The Russian effect
Russia's move to take over Crimea has affected the energy market from oil to coal. If you invest in the energy space, keep a close eye on this still developing story. If you've been looking at the out of favor coal industry, meanwhile, Russia could be the precipitant that gets East Coast miners back in the coal game. Alpha, Alliance, and CONSOL could all be beneficiaries.

But don't forget the really big U.S. energy change taking place today...