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What Bargain-Hunting Investors Should Know About the Coal Industry

By Motley Fool Staff - Apr 22, 2016 at 8:00AM

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Coal is at an abysmal low, but even as cheap as producers are now, buying into the industry is probably not the wisest move.

The news about Peabody Energy's bankruptcy and reflection on the year's-long decline of coal probably have some investors thinking, "This space must be at an all-time low. Maybe I should buy in now. After all, how could things possibly get any worse?" Short answer: Things absolutely could get worse.

In this segment from the Industry Focus: Energy podcast, Taylor Muckerman and Tyler Crowe explain a few of the most important facts potential investors should know before touching coal stocks with a 10-foot drill bit.

A full transcript follows the video.

This podcast was recorded on April 14, 2016. 

Taylor Muckerman: Any upside that you see out of coal in the future? Maybe not companies to invest in, but just the industry?

Tyler Crowe: I'm going to play a little bit of a devil's advocate here. You hear the things: Coal still represents 32% of our generating capacity, we have to have coal for a while longer, and that's fine. I understand that. But, just to play a little devil's advocate -- for investors, you want to play both sides off of each other -- as much as it could be prominent, I think it's going to be very difficult to be a very good place to invest over the next several years, regardless of the company that you choose, whether it's well-financed or not. And here's one of the things, just to give you an example of what we're looking at. We've been talking about oil, this massive inventory overhang in oil. We've got so much that we don't know what to do with it, and it'll take years for that amount of oil to clear. If you break it down into consumption, it's about 60 days worth of consumption in the United States. If you look at coal's inventory, basically, how much is built up in inventory ...

Muckerman: If we ceased all production, this is what they could live off of.

Crowe: Right. You could go for 200 days.

Muckerman: See, now, that's what you kind of want in your nuclear bomb shelter right there.

Crowe: Exactly.

Muckerman: You want 200 days' worth of food and water, and this is what the coal industry has.

Crowe: But, when you have companies that are bankrupt that are still producing because they have to pay off debts, and companies that are still producing because they're trying to still make a buck to stave off bankruptcy, when is the glut going to clear? That's the biggest thing that I look at it, as one of those things where, how can we take that much oversupply in a declining industry and really make money? I think it's going to be a very, very hard thing, and anybody who's looking at this space should be well aware of that risk. And, I would say, tread carefully.

Muckerman: Yeah, exactly, especially when you think about, not only is coal cheap, but natural gas is really cheap, it's cleaner, and nuclear power plants, they're the base load that is even cleaner than natural gas, much more expensive to turn off and turn on. So, you have these two base loads that are cleaner, somewhat more efficient, and now you have this huge overhang of coal. So, I'm wondering if they're going to start some negotiations together, and be maybe like a miniature OPEC of coal producers in the U.S., because I doubt one company in particular will be like, "Oh, yeah, we'll just rely on ... "

Crowe: "We're fine, don't worry about it, we'll take care of it."

Muckerman: "That's right, we'll reduce our production for everyone."

Crowe: Yeah, right.

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