Don’t Let the EPA Spook You Out of Coal Stocks

The EPA sparked selling in Arch Coal and Walter Energy, but the market is missing part of the picture

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Don’t Let the EPA Spook You Out of Coal Stocks

As Forbes’ Christopher Helman explained following Monday’s news, the advent of electricity sources like solar, wind, natural gas and cleaner-burning coal power plants in the meantime has already reduced 2005′s carbon output by 15%. Ergo, we’ve only got 15% left to carve out, and we’ve got 15 years to figure out how to get there. That’s plenty of time not just to optimize alternative sources of electricity, but 15 years to figure out how to use less electricity in the first place.

Thing is, we’ve already got the tools to put make that happen in a very significant way. LED light bulbs use 80% less electricity than conventional light bulbs. That’s a big deal, considering that lighting accounts for 40% of electricity usage in a typical home. Mathematically, switching to LED bulbs alone would mean a typical home could use 32% less energy than it presently uses, achieving the EPA’s goal.

And if that doesn’t do the trick, zero-carbon-emission solar energy is close to reaching cost-parity with most grids, and the financing of solar panels now makes them affordable for any consumer. Solar only supplies about 0.2% of the nation’s current energy demand, so the sky’s the limit for the positive impact more solar power could make to offset coal’s downside.

Point being, the states might be able to reach the mandated goals simply by accelerating initiatives that are already underway.

Bottom Line for Coal Stocks

None of this is to say coal stocks like Walter Energy and Arch Coal (Peabody primarily serves the Pacific market and isn’t overly vulnerable to EPA rules) won’t feel the effect of tougher greenhouse gas emission standards. They will. These companies make more money by selling more coal, and if we’re burning less of it, it means less revenue for these miners. Under the EPA’s proposed plan, however, the coal industry survives. That’s more than many of its critics were expecting in 2009 when fracking became common and solar power became feasible.

And interestingly, while one arm of the government seems to be doing all it can to crimp coal, another arm of the same government — the Energy Information Administration — still predicts that annual coal production will grow between now and 2040 (albeit at a modest 0.3% per year). It’s not great, but it’s better than the alternative.

The reason for the tepid optimism is rich, too … growing demand for natural gas should, ironically, push gas prices to levels that make coal attractive again, regardless of the carbon emission costs. The EIA seems to be the first and only organization to recognize that natural gas prices will ramp up with the coming swell of demand the EPA is ultimately working to create, creating more pain in the pocketbook than most consumers are going to overlook.

The bottom line is, while they might never be red-hot again like they were in 2008, coal stocks are still oversold from their 2011-13 implosion, and still have more upside than downside here now that the EPA has found a way to fit coal into the long-term plan. The fact that coal prices are still on the rise since last August’s low confirms demand is still recovering.

The highly vocalized posturing and threats from all the interested parties in the meantime is just good business.

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


Article printed from InvestorPlace Media, http://investorplace.com/2014/06/epa-coal-stocks-aci-wlt-btu/.

©2014 InvestorPlace Media, LLC

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