3 Ways to Play Coal & Natural Gas (At Once)

by Aaron Levitt | June 26, 2013 9:02 am

Like Sgt. Slaughter battling the Iron Sheik in a cage match, America’s two most abundant fuels — coal and natural gas — have been locked in a seeming death match lately.

To start, the much ballyhooed advances in hydraulic fracturing and horizontal drilling unearthed a virtual ocean of natural gas, which dropped prices down to decade lows … and subsequently had scads of utilities preferring it over coal. Already, more than 100 older coal-fired power plants are scheduled to retire across the country.

Of course, coal prices tanked in response to this trend … so much so that several utilities actually found it cheaper to use[1] the fossil fuel once again, despite new additional costs associated with increased environmental regulation.

Surprise, surprise — natural gas responded by falling downward. And so the cycle continues. All in all, it’s enough to make any energy investors head spin.

But there’s good news: A few companies are profiting no matter which fuel is on top … so investors can have their cake and eat it too.

With that in mind, here are three solid picks for your energy portfolio.

Consol Energy

At first blush, Pennsylvanian-based Consol Energy (CNX[2]) may look very much like a typical coal miner, as about 80% of its revenue came from the fuel in 2012. Really, it’s much more.

The company’s gas division produces and explores for unconventional gas — including coalbed methane —  in regions like the prolific Marcellus[3] and Utica shales[4] as well as upcoming hot-spots like the Chattanooga, Huron and New Albany shales. Overall, CONSOL has drilled nearly 13,000 net producing wells and has access to roughly 4.0 trillion cubic feet of proved natural gas reserves- including both coalbed methane and shale beds.

That additional focus on natural gas helped make the firm realize profits in 2012 even as other coal producers — like Walter Energy (WLT[5]) and James River (JRCC[6]) — struggled to stay in business. Consol even managed to up its dividend slightly last year on the back of higher natural gas production. With the company plowing more CAPEX spending into its gas division, investors can expect a more even product mix — as well as more profits — in the future.

Plus, Consol’s final ace up its sleeve comes from its services division. The firm owns a host of midstream, gathering and coal terminal assets — the kind of stuff that can be “dropped down”[7] into a master limited partnership (MLP) subsidiary. If management ever looks to implement the tax savings strategy (which it should), CNX shares could pop even more.

CNX currently trade for a forward P/E just under 15. That’s pretty cheap considering the duality of its production mix.

Penn Virginia Resource Partners

Penn Virginia Resource Partners (PVR[8]) has unique approach to its coal assets. Instead of mining the product itself, the company leases its lands to third-party coal producers and Penn Virginia collects royalty payments in return.

That strategy has helped it insulate itself from the worst parts of the coal meltdown[9]. To help insulate itself even more, Penn Virginia has begun to add more natural gas exposure to its mix. But unlike CNX, PVR has decided to focus on pipelines rather than production.

Back in 2012, the company purchased midstream firm Chief Gathering — a strategic acquisition that added roughly 120 miles of gathering pipelines in the Marcellus Shale. In addition to those assets[10], the firm owns approximately 100 miles of natural gas gathering pipelines and 42 miles of fresh water pipelines in the region … and approximately 4,541 miles of natural gas gathering pipelines in the Texas and Oklahoma panhandle.

All in all, its midstream segment continues to drive earnings. Back in 2011, the division only supplied 37% of EBITDA. That number jumped to 56% last year and is projected to be at approximately 78% by the end of 2013. Such a reliance on steady pipeline assets — with a bit of coal and timberlands[11] thrown in — will help support the MLP’s eye-popping 8.3% dividend.

Natural Resource Partners

Like Penn Virginia, Natural Resource Partners (NRP[12]) leases its coal reserves to third-party operators for excavation. Over the last few years, though, NRP has began leasing its lands to natural gas producers[13] as well. While only about 3% of its royalty mix is oil and natural gas drilling, the company has made the focus a priority for future growth … as seen with some of its serious land acquisitions.

Towards the back half of 2012, Natural Resource Partners acquired nearly 88,000 net acres in the liquid-rich window of the Marcellus Shale[14]. Already, the property is fully leased and contains producing wells, but NRP also plans on adding significant additional development on the acreage. That follows a 19,200 acreage purchase in the Mississippian Lime back in 2011.

Plus, the company’s latest deal is a doozy as well. For only $35.3 million in cash, NRP will buy a non-operated stake in 13,500 acres located in the Bakken/Three Forks formation from Abraxas Petroleum (AXAS[15]). The current purchase in the Bakken[16] will go a long way to support Natural Resource’s goal of achieving $330 million to $375 million in revenue from oil/gas this year.

Given that it is still mostly a coal play, NRP yields the most at over 10.5%. However, that high yield is due the coal risk associated with the MLP. As it continues to add more natural gas royalties to its arsenal, that underlying dividend will only be strengthened. Investors could be getting the deal of a lifetime here.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. cheaper to use: http://investorplace.com/2013/04/could-coal-stocks-be-making-a-comeback/
  2. CNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNX
  3. in regions like the prolific Marcellus: http://www.consolenergy.com/natural-gas-amp-coal/natural-gas/marcellus-shale.aspx
  4. Utica shales: http://investorplace.com/2013/05/the-utica-is-quite-gassy-and-thats-okay/
  5. WLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLT
  6. JRCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JRCC
  7. “dropped down”: http://investorplace.com/2013/06/do-the-drop-down-dance-with-spectra-energy/
  8. PVR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PVR
  9. coal meltdown: http://investorplace.com/2013/06/walter-energy-the-next-coal-casualty/
  10. In addition to those assets: http://www.pvresource.com/About-PVR/Operations/default.aspx
  11. timberlands: http://investorplace.com/2013/06/weyerhaeuser-is-more-than-a-housing-play/
  12. NRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=NRP
  13. natural gas producers: http://investorplace.com/2013/06/bp-adds-more-northern-exposure/
  14. Marcellus Shale: http://investorplace.com/2012/11/a-far-more-muscular-marcellus-shale-beckons/
  15. AXAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=AXAS
  16. Bakken: http://investorplace.com/2013/05/6-ways-to-play-the-bigger-and-badder-bakken/

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