by Aaron Levitt | December 19, 2013 9:55 am
It hasn’t been the best couple of years for investors in coal stocks.
Coal stocks have faced the dual threat of falling demand coupled with rising regulation. First, our abundance of natural gas — which has been great for the oil stocks — has pushed prices down for the fuel towards historic lows. That’s causing utilities to abandon coal in favor of cheap natural gas for electricity generation.
Exacerbating the plight of coal stocks is rising environmental legislation. New rules created by the EPA have pushed utilities towards natural gas. New plants are essentially being forced to run on the abundant and cleaner burning fuel. That’s prompted several coal stocks to close mines and others to like Patriot Coal (PCXCQ) to close up shop and file for bankruptcy protection.
However, all this hatred towards coal stocks could provide tantalizing values for investors who want bargains. Several of the largest and best-run coal stocks are currently trading for peanuts. Meanwhile, coal is still widely used worldwide in steel manufacturing and in many emerging markets to generate electricity.
Simply put, the coal stocks trio of Peabody Energy (BTU), Alpha Natural Resources (ANR) and Cloud Peak Energy (CLD) could be some of the biggest bargains out all energy stocks.
When it comes to coal stocks, Peabody Energy (BTU) is definitely king of them all.
BTU stock is appealing because Peabody is one of the largest producers of the mineral. The BTU empire spans 28 different mines across several nations — including the U.S., Australia, Indonesia and China. That global reach has allowed Peabody Energy to profit even when things turned sour for coal stocks here at home. BTU has a much easier time tapping into markets in electricity-hungry Asia than many other domestic coal stocks.
Not to mention that prices for coal are better overseas as well.
For the first nine months of the year, Peabody Energy was able to sell Australian-produced coal at around $112 per ton. Meanwhile, it only cost BTU around $80 per ton to produce. By contrast U.S. mined coal only netted BTU around $18 per ton at a cost of $13.
Meanwhile, Peabody Energy continues to cut costs via prudent CAPEX spending and lowering its debt. BTU stock currently features an industry low debt-to-equity ratio of 130%.
All in all, its global reach and low costs of production have made BTU stock one of the only profitable coal stocks around. Based on 2016 earnings estimates, BTU stock currently can be had for dirt cheap P/E of just 7.
For coal stocks, Wyoming’s Powder River Basin features some of the best coal reserves on the planet. Aside from the sheer amount of coal, it has some of the lowest sulfur-producing reserves. That makes it ideal for utilities trying to skirt new EPA rules about emissions.
It also happens to be the primary stomping ground for Cloud Peak Energy’s (CLD) — one of the top coal stocks out there.
With royalty agreements with the Powder River Basin’s Crow Tribe, CLD has unprecedented access to the region’s vast reserves at cheaper costs than its competitor’s holdings. CLD stock could get a boost from future exports of PBR coal. The pending Gateway Pacific Terminal — which will be used to send PBR coal directly to Asia — happens to sit in CLD’s back yard.
With that sea-port still in the planning/construction stages, CLD has been cutting costs, conserving cash and idling excess mine supply. That puts coal stocks like CLD in a prime position to benefit when coal prices rebound.
CLD stock can currently be had for P/E of 16.
With the global economy finally beginning to move forward, Alpha Natural Resources (ANR) is one of a few coals stocks that could be an interesting turnaround play. See, unlike CLD and BTU, ANR mainly produces metallurgical coal — the kind used in steel making.
Currently, metallurgical coal prices are flat due to oversupply. That’s hurt the company’s bottom line and ANR stock over the last few quarters. However, with industrial output ramping up in key steel producing nations — namely, Japan, China and South Korea — the medium- to longer-term picture seems to be a bit rosier for ANR stock.
At the same time, ANR has a few aces up its sleeve vs. other coal stocks. First, Alpha Natural Resources plans on selling its ownership stake in a shale gas joint venture for $300 million in cash and shares to Rice Energy. Aside from boosting its near-term liquidity, Rice Energy plans to IPO in early 2014. That will provide a nice exit event for ANR stock.
Secondly, ANR recently issued a series of convertible notes at a cheap 4.875% interest rate. Those notes will be used to retire current liabilities. Overall, the bond issue and shale gas sale boosted ANR stocks liquidity to nearly $2 billion. That should be more than enough to help ANR stock ride out the downturn in metallurgical coal prices until they rebound. That liquidity position is enviable for many other coal stocks.
In view of the better long-term picture, investors may want to give ANR stock a go. And if not, the other coal stocks on this list are solid if you want to bet on the beaten-down sector.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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