It’s been a busy few days for the Supreme Court. And while everyone was cheering or jeering the ruling in favor of same-sex marriage, a ruling in favor of the coal industry with regards to air quality is a big win for a certain group of beaten-down stocks that have been absolutely destroyed.
But the truth is, the coal sector isn’t going to win big from the Supreme Court’s ruling. Natural gas stocks will. And they should win in spades.
In fact, the ruling could be the spark needed to jump-start higher commodity prices for natural gas stocks down the road. For investors, it’s time to snag up some cheap natural gas stocks.
The Supreme Court’s Ruling
The high court’s decision focused on rules enacted three years ago by the EPA to limit the amount of mercury, arsenic and other toxins coal-fired power plants emit during electricity generation.
Those rules and the higher costs associated with complying with those rules crippled the coal sector and killed demand for the fuel.
After a lengthy legal battle, the Supreme Court decided that the EPA overstepped its bounds because it didn’t consider the cost impact to the coal industry when it made its rule. Basically, it went too far, too fast when it tried to curb pollutants from coal-fired plants.
As such, the rules are no longer mandatory and power plant operators now have plenty of time and flexibility to continue using coal as their generation source.
Needless to say, coal stocks like Peabody Energy (BTU) and Arch Coal (ACI) went ape on the news. Here was going to be their lifeline. Except that it’s not.
A Secret Win For Natural Gas Stocks
The EPA rules were created nearly three years ago. And given the long lag time to comply with such constraints, many utilities have already begun the process of phasing out their coal plants and/or installing the mercury emissions controls.
According to data supplied by SNL Energy, nearly 200 plants — or nearly 20% of the U.S.-generating capacity — are in the final stages of installing the required controls.
And remember that the EPA is free to revisit these rules with cost provisions added in at any time. The agency indicated it would begin drafting a new set of rules quickly. Additionally, EPA rules on carbon emission limits remains very much in force — with the Supreme Court upholding those rules last year as well as the EPA’s across-state-line pollution rule for carbon emissions.
So coal bulls shouldn’t get their hopes up.
Natural gas will continue to be the big winner from the EPA’s rules. With the carbon regulations still withstanding, low carbon dioxide-emitting natural gas continues to get the bid from utilities. The fuel’s lower price — thanks to fracking — has also helped. All in all, coal demand should dwindle a 1.7% on average over the next five years as more utilities shut down plants to deal with the EPA’s previously enforced rules.
Natural gas will win on another front as well. The current ruling gives utilities the ability to choose natural gas-fired plants over zero-emission wind and solar projects. Even with subsidies, natural gas remains cheaper option than either of the two renewable energy sources.
And since they don’t need to worry about their total emissions profile just yet, utilities will cancel non-started renewables projects in favor of natural gas.
Time To Load Up On Natural Gas Stocks
With the Supreme Court ruling a net-positive for cleaner burning natural gas, the time to load up on natural gas stocks could be now. Already, prices for natural gas futures climbed when the ruling was announced — with the August contract gaining 1.3% to reach $2.80 per MMBtu. That’ll mean higher profits for the firms that produce the fuel.
The First Trust ISE-Revere Natural Gas Index ETF (FCG) is still the best way to play the production side of the fuel. FCG tracks 30 firms that derive the majority of their profits from natural gas production. Top holdings include Magnum Hunter Resources (MHR) and QEP Resources (QEP).
Over the last few years and as natural gas prices have dropped, FCG has been a real dog — cratering 60% in the last year. However, with more utilities currently using the fuel and more set to do so in the near future, shares of FCG could finally regain its lost mojo.
A perhaps safer way to play the continued bullishness in natural gas stocks and rising demand is to focus on those firms that supply natural gas to utilities through pipelines and other midstream infrastructure.
A prime pick could be Spectra Energy (SE). Spun off from mega-utility Duke (DUK) back in 2007, SE is a midstream giant and features more than 22,000 miles worth of pipelines across natural gas, NGLs and oil, as well as a variety of storage assets. The crown jewel could be its high capacity interstate and intrastate pipelines — the kind that feed into utilities’ generation plants.
While low natural gas prices have clipped its processing businesses, growth in its natural gas distribution businesses should help offset weakness over the longer term. Also helping is that SE is the general partner of two master limited partnerships (MLPs). The IDRs and distributions from both Spectra Energy Partners (SEP) and DCP Midstream Partners LP (DPM) will continue to pad SE’s cash flows and boost its dividends. In the meantime, investors can snag shares of the natural gas stock near a 52-week low and a 4.6% dividend yield.
The Bottom Line
While the coal stocks may have cheered the Supreme Court’s EPA decision, the real winner will be those natural gas stocks and midstream firms focused on utilities. Many utilities are already converting their electric plants away from coal, and coal demand is expected to continue to fall.
With natural gas stocks taking a beating in recent months, now may be the time to jump on some some good buys.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
