First, the main reason for coal’s place in the sun has been rising natural gas prices — something that appears to be changing. Already, demand for natural gas a fallen, and E&P firms are once again producing an abundance of the fuel. While inventories are still below 5-year averages — due to the prolonged drawdown during the winter — the trend for new gas entering our storage facilities is upward.
Last week, the Energy Information Administration (EIA) reported that inventories of natural gas increased by 74 Bcf (billions of cubic feet). That brought current supplies up to 1055 Bcf, whichwas more than what analysts had been predicting. Following several weeks of rising inventories, Henry Hub natural gas prices are now trading for around $4.57 per MMBtu — right around a good place for utilities to start switching over again.
And more importantly, when they do switch, they aren’t going back. Retrofitting and building new gas fired plants cost billions of dollars to do. Once a utility puts in the capex, they aren’t going spend more to go back to coal. Nor do they have an incentive on the regulation front. The Obama Administration and the EPA have essentially made coal enemy number one. The costs for using coal as your fuel source are growing — even when the price of it has fallen.
Aside from those factors, pressure on coal stocks could be coming from another front — pension funds and institutional investors.
Stanford University’s recent decision to sell nearly $18 billion worth of coal shares from its endowment is just the latest bid by various large institutional investors to use activism to their advantage. Both CalPERs & CalSTERs — two of the largest pension funds with well more than $300 billion in assets — have both flexed their combined muscle when it comes to green and social responsible investing. So has the State Retirement System of New York.
As institutional investors continue to dump coal from their portfolios, the downward pressures could be great.
Leave Coal Stocks Alone
In the longer term, it still looks like coal’s days are numbered here in the U.S. The pressures are still there and the recent rally may be short lived. The coal sector shake-out is still only in the third inning or so.
As far as BTU’s recent upgrade of coal stocks, Peabody is probably the best investment. Its size, scale and scope makes it perfect to weather the continued storm. It’ll still producing far into the future and most likely exporting the bulk of that production. If you’re going to bet on the sector, BTU is the one to choose.
As for the rest of sector — ANR, ACI etc. — coal still remains a possibly profitable trade for this year. But the longer-term pressures are just too great to make coal a good investment.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.