The last few years have been a torrent of pain for the coal stocks. Everything from lower costs for competitive energy sources to new environmental regulations have plagued the sector.
Those issues continue to drive coal prices lower and lower. All in all, that’s caused plenty of operating losses, mine closures and even a few coal stocks filing for bankruptcy protection over the last few quarters.
Needleless to say, prices for shares of coal stocks continue to hit new lows. Yet there is some optimism — namely, rising exports of the fossil fuel.
But investors may not want to bet directly on the miners of the energy source. There’s another way profit from U.S. coal’s only hope at survival — one that doesn’t hinge on any single miner’s health.
Terminals Over Coal Stocks
For companies like Peabody Energy Corporation (BTU) and Arch Coal Inc (ACI), the tale hasn’t been the domestic market. Coal use in the United States continues to drop as more utilities switch to natural gas for electricity generation. Thirty-two coal-fired plants are scheduled to be retired at the end of 2015.
The EPA’s continued “attack” against the fuel haven’t helped the industry — the Obama administration’s pledges on climate and pollution remediation include a 30% reduction in carbon emissions by 2030 and the easiest way to do that has been restricting construction of new coal generating plants and saddling older ones with new scrubber restrictions.
So with more than 180 years’ worth of coal reserves located in the U.S., what’s a miner to do given the domestic situation? Export it to places where they still love coal, of course.
According to the Energy Department’s Annual Energy Outlook, coal exports from the U.S. will rise by 33% to 128 million tons by 2020 before reaching 148 million tons by 2030. Driving those gains is rising global demand.
Despite growth of LNG, solar and other energy sources, the world is still requiring coal to meet its energy needs. Analysts estimate that by 2017, coal will replace oil as the world’s top energy source.
And while at first blush, lower coal prices may look like a bad thing for U.S. producers, it could actually be a blessing. U.S. coal is now the cheapest option for many nation’s looking to get their fix. U.S. coal futures on the NYMEX can be had for about $53, compared to $62 for Australian benchmarks and $73 for European coal. And thanks to the glut of seaborne coal tanker supply, shipping costs are next to nothing.
In some instances, it’s now cheaper for China to get its coal from the U.S. rather than Australia.
The problem is that low price doesn’t do much for coal stocks earnings. For example, Alpha Natural Resources, Inc. (ANR) lost 84 cents a share last quarter — its umpteenth quarterly loss. However, there are few coal stocks that are marginally profitable.
But as the only game in town, the miners are going to take it and export away. Which is why you shouldn’t buy the miners, but the owners of the terminals along the Gulf of Mexico and on the East Coast. They’ll continue to benefit as they earn fees — from any miner — that wants to ship their product outward.
Two Terminal Coal Stocks To Buy
Kinder Morgan Inc. (KMI): As if you needed another reason to love the kingpin of midstream firms. In addition to its 80,000 miles worth of pipelines, KMI is one of the best ways to play rising coal exports.
Over the last few years, Kinder Morgan has purchased coal terminal assets along the Gulf Coast — in Louisiana and Texas — and is now one of the largest owners of such assets in the region.
However, it’s not done yet. The firm has pledged about $450 million to upgrade facilities, including a new terminal in South Carolina. All in all, coal is becoming a big part of the firm’s asset mix.
Fresh off its recent master limited partnership (MLP) reduction efforts, Kinder Morgan can now tap equity markets easier to fund any coal-related expansion plans. Meanwhile, investors in KMI stock get a juicy 4.3% yield. That’s something that’s not found in many coal stocks.
CONSOL Energy Inc. (CNX): This company is setting itself up to be quite an interesting bet among coal stocks. CNX’s drive to expand into natural gas is paying benefits in spades on the earnings’ front.
But, CONSOL is still very much a coal name and is one that happens to operate one of the largest terminals on the East Coast.
The Baltimore Marine terminal has a capacity of about 15 million tons annually and is the only terminal 100% owned by a coal company. That gives CNX an advantage over other coal stocks — it doesn’t have to pay fees to export its production. In fact, other coal miners pay it to use that capacity.
And the story for CNX gets better in terms of its coal terminal capacity. CONSOL may place the facility inside a MLP. The facility could get dropped down into its recent midstream spinoff CONE Midstream Partners LP (CNNX) or better yet, a specific coal designed MLP in the works.
Either way, that will allow CNX to take advantage of significant tax breaks associated with the facility’s cash flows. For investors, you get a real chance to profit from world class terminal assets on the East Coast.
U.S. coal stocks are going to be exporting more of the fuel in the upcoming years. The real play is in the firms that own that exporting capacity. Both KMI and CNX operate some of the best facilities on their respective coasts to do just that.
As of this writing, Aaron Levitt was Long KMI.
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