Investors are cautiously betting on King Coal’s rebound, and one company in particular should be worthy of your attention…
Where the coal industry will be a decade from now is anybody’s guess.
It’s no secret that coal plants are retiring across the country, but it doesn’t necessarily mean that the sector’s demise is inevitable or coming anytime soon.
Sure, the popularity of natural gas over the past few years has steadily chipped away at coal’s long-time dominance in the energy pie – but changes in the coal market are leading to a newfound optimism over its future.
First, The shift towards carbon-capture and storage (CCS) technology, for example, is helping to lead the way in reducing CO2 emissions in coal and other industries.
According to the International Energy Agency (IEA), CCS has the potential to contribute to 22% of global CO2 mitigation through to 2035 and save an estimated $4.7 trillion in costs related to climate change.
Next, you have the growing use of wind power as an alternative energy source. Wind energy has grown rapidly in the last decade, with an average increase of 29.7% per year.
Ironically though, wind power depends greatly on coal power to build its massive wind turbines.
According to manufacturer Vestas (OTCMKTS:VWDRY), a single offshore turbine requires 250 tonnes of coal during construction, while an onshore unit uses 150 tonnes.
And third, domestic demand is picking up.
The US Energy Information Administration (EIA) reports that domestic consumption of coal in the first half of 2013 was 8.8% higher than the first half of 2012.
They expect the second half of 2013 to also improve over the second half of 2012 by 5.1%, citing continued growth in the electric power sector due to higher electricity demand and higher natural gas prices.
Of course, the caveat has been the Environmental Protection Agency’s (EPA) emissions cap on new coal plants.
The new rules stipulate that any new coal plant must emit no more than 1,100 pounds of CO2 emissions per megawatt-hour– making them slightly more than a natural gas power plant.
But among the coal supporters there are those who feel that improvements to emissions output are actually beneficial in the long run.
In fact, the World Coal Association estimates that the average efficiency of coal plants around the world is around 34%, which is well below the state-of-the-art rate of 45%.
The WCA believes that if older (30+ years) and smaller (less than 250MW) plants around the world were replaced with new ones, global greenhouse gas emissions would be reduced by a whopping 5.5%.
That would essentially exceed the goal of all the climate change measures outlined in the Kyoto protocol.
Furthermore, coal giant Peabody Energy (NYSE:BTU) estimates that coal plant utilization in the US hovers around 60% when it should be closer to 80%.
So even though the new EPA rules bring the hammer down on old inefficient ways of producing energy, they’re also pushing plants to improve efficiency, which will ultimately contribute to their bottom lines.
Now I know what you’re thinking.
What good are these new measures if there are barely any companies left to meet the demand?
This question brings us to the producers themselves who have bore the brunt of this downturn in the coal industry.
Lately, we’ve seen a number of coal producers bounce back from all-time lows.
But upon closer inspection, many of them are simply lowering capacity and slashing costs in order to offset lower revenues. In other words, the industry as a whole has shrunk to a fraction of its former self.
Such is the case with Alpha Natural Resources (NYSE:ANR) who just announced that it will be cutting 230 jobs and reducing their 2013 CapEx.
CONSOL Energy (NYSE:CNX) also says that it will sell five of its coal mines to Murray Energy for $3.5 billion.
And let’s not forget Patriot Coal – the Peabody Energy spinoff that ended up claiming bankruptcy in July 2012.
But believe it or not, not all companies are doing poorly.
Best Coal Stock to Buy Today:
Moving in nearly the exact opposite direction is Alliance Resource Partners (NASDAQ:ARLP).
Despite a still-volatile coal market, Alliance has managed to post record results.
In Q3 2013, the Company reported 5% higher revenue, a 44% spike in net income, and a 24% jump in EBITDA compared to the previous quarter.
A big part of this has to do with the rise in popularity of Alliance’s most important source of revenue – Illinois Basin coal.
According to coal transporter CSX Corp. (NYSE:CSX), cheaper alternatives like coal from Illinois is gaining market share from coal produced in the once-dominant Central Appalachian region.
In fact, many of the larger, accessible seams in Central Appalachia have already been mined out, leaving producers with deeper, more costly seams to work with.
Additionally, Central Appalachian coal by nature is more expensive because it contains less sulfur than the alternatives.
But thanks to plants adding scrubber systems to their operations, they can handle cheaper coal without increasing emissions – thus giving Illinois coal producers a competitive advantage.
As a result, Illinois coal now makes up 28% of CSX’ inventory – more than double what it was back in 2010.
Looking ahead, Alliance’s coal production to the end of 2013 is projected to rise up to 14%, and revenues are estimated to climb by up to 9.4% year over year.
By being a master limited partnership, Alliance is also required to distribute nearly all of its profits back to investors.
In early November, the Company’s dividend payout of $1.175 per unit was 8.3% higher than November 2012 and marked the 22nd consecutive quarterly increase.
While most coal companies are just a shadow of their former selves, Alliance has bucked the trend and has returned to 2011 levels.
And by all accounts, Alliance has room to run.
That said, the industry as a whole isn’t fully in the black just yet. So for those considering leaping back in, look to miners that have exposure to the Illinois Basin.