Even as the stock market touches new all-time highs, signs are emerging that the Trump administration will soon move to overturn several environmental regulations. Most of them, such as the Clean Power Plan, are a legacy of the Trump era. Eliminating such restrictions would be in keeping with the President elect’s promises to revive the coal industry.
With coal prices surging immediately after the election, the optimism in the sector is more than palpable. Given the President’s recent orders on the oil and gas sector, similar decisions on coal and conventional power should be expected soon. Investing in stocks poised to gain from these decisions may be a smart option at this point.
Repealing the Clean Power Plan
On the campaign trail, Trump promised to reverse Obama’s clean energy proposals. The President incumbent had also promised to roll back the investment tax credit for solar power and the Environmental Protection Agency’s Clean Power Plan.
The Clean Power Plan is the Obama administration’s key environmental reform and mandates states to slash their carbon dioxide emissions. However, its actual implementation remains incomplete due to the legal obstacles put in its path by Republican dominated states.
Experts believe that Trump will ask the EPA to request courts to return it the agency for a review. In one stroke, this will end any attempts to defend the plan legally. In Dec 2016, Dynegy Inc.’s (DYN) CEO Robert Flexon had said that the removal of subsidies for alternative energy sources would provide a level playing field for conventional power producers.
Coal fired plants would stand to gain the most, though this may not result in fresh capacity additions. Instead, existing coal fired plants would then be in a position to snatch market share away from nuclear and natural gas based power producers.
Coal Prices Surge, Mining to Benefit
As a result, Flexon added, such a stance on power would be especially beneficial for the coal mining sector as well. The capacity factor for coal would rise and miners would have to step up production to meet the increased demand from power plants. In fact, compared to the elimination of the Clean Power Plan, it would be easier for Trump to remove the Obama administration’s ban on coal mining. In Jan 2016, the previous government had placed a temporary ban on fresh federal coal leases in order to ensure that lease deals accounted for coal’s impact on climate change.
Naturally, such a step had been extremely unpopular among lawmakers from states in the West as well as the mining industry. But the situation has changed vastly ever since Trump won the election. Following his victory, coal was trading at $110 per metric ton (MT), nearly twice as much as its price in the first quarter of 2016. Despite a slight decline, coal was trading at $83.50 per MT on Feb. 28, 2017, which is still substantially higher.
Immediately after assuming office, Trump brought to an end several environment related regulations which hark back to the Obama era. This includes the Stream Protection Rule which placed limits on the dumping of waste generated from coal mining. Additionally, Trump has also repealed the Waters of the U.S. rule which had broadened the number of waterways eligible for federal protection.
The rally in coal prices and the optimism among producers of conventional energy is conclusive evidence that the Trump administration has infused new vigor into these sectors. Even skeptics have been forced to admit that a mood of “cautious optimism” now exists, a sharp contrast to the gloom that had set in over the Obama years.
This is why it makes sense to pick stocks poised to gain from the new administration’s coal related actions.
We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Arch Coal Inc (ARCH) is engaged in the mining, processing and marketing of low-sulfur bituminous coal.
Arch Coal has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 50.7% over the last 30 days. The stock has returned 18122% over the last one year, easily outperforming the Zacks Coal sector, which has gained 129.1% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CONSOL Energy Limited (CNX) is a multi-fuel energy producer and an energy services provider, primarily catering to the U.S. power producers. The principal activities of its PA Mining Operations division are mining, preparation and marketing of thermal coal, sold primarily to power generators.
CONSOL Energy has a Zacks Rank #2 (Buy). Its expected earnings growth for the current year is more than 100%. Its earnings estimate for the current year has improved by 96.4% over the last 30 days. The stock has returned 55.8% over the last one year, underperforming the Zacks Coal sector, which has gained 116.7% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential
Ameren Corp (AEE) is a utility company, which generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois. Ameren generates a considerable share of electricity from coal-fired facilities.
Ameren has a Zacks Rank #2. The company has expected earnings growth of 3.5% for the current year. Its earnings estimate for the current year has improved by 0.1% over the last 30 days. The stock has returned 16.5% over the last one year, outperforming the Zacks Utility – Electric Power sector, which has gained 4.9% over the same period.
Pinnacle West Capital Corporation (PNW) provides electricity services (wholesale or retail) in the state of Arizona through its subsidiaries. As of Sep 30, 2016 coal is projected to constitute 27% of the generation mix in 2017
Pinnacle West Capital has a Zacks Rank #2. The company has expected earnings growth of 7.6% for the current year. The stock has returned 20.3% over the last one year, outperforming the Zacks Utility – Electric Power sector, which has gained 4.9% over the same period.
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