Even though state governments, utilities and the entire green movement want to move away from the use of fossil fuels like coal, the stark reality is the amount of the nation’s electricity that is generated by burning coal will continue to grow because of coal’s high heat content.
In fact, coal’s percentage of total electrical output is rising — it currently fuels 49% of the U.S.’s electrical needs and will likely account for 54% of our electrical needs by 2030.
What’s more is that this is one energy source that we don’t need to rely on overseas supplies — the U.S. currently is home to one of the highest concentrations of coal reserves in the world. The Central Appalachian mountain region holds the U.S.’s largest coal reserves, and the coal mined there is most-widely used by power plants. It is largely considered the benchmark grade for pricing purposes.
But despite the U.S.’s large coal reserves, coal prices are still correlated to foreign-demand pressures and events occurring beyond our borders. Floods in Australia (the world’s largest coal exporter) and China’s heavy winter storms both impacted prices significantly last year, as coal production drastically declined in China and Australia due to these natural events. And it couldn’t have occurred at a worse time since emerging countries in Asia are rapidly expanding and their electricity needs are growing just as quickly.
Rising Demand and Limited Supplies
So, due to rising demand and limited supplies, U.S. coal exports in 2008 increased by a whopping 38%, which also led to a 2.1% increase in coal production in the U.S. And it is projected that the average price for delivered coal to the electric power sector jumped 16% last year.
High electric rates aren’t likely to disappear anytime soon, either. Utility bills have jumped drastically since late 2007, and when you consider the world’s demand for U.S. coal will remain high as emerging markets continue to grow, electric rates in the U.S. will continue to move higher as well. Such a trend suggests that the rise in electric rates during the next 10 years will be double that of the electric rates of the past 10 years.
So in order to ease some our pain with monthly electric bills — especially during the summer months when electricity use pops from air conditioners — I think that you should dedicate a portion of your investable capital to the utility sector. It’s not only a highly defensive sector during these tough economic times, it will help offset our rising household electricity costs with healthy, steady profits.
NEXT: Top Coal Stocks to Buy Now
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Top Coal Stocks to Buy Now
I believe there’s a very compelling story with coal stocks, even though coal sold off in the second half of 2008 like most commodities.
That’s because coal companies’ shares doubled in 2007 and, in my opinion, they could well double again in another two to three years based on rising coal demand around the world.
That’s why I’ve been advising that my Cash Machine subscribers add two coal Master Limited Partnerships (MLPs) to their portfolios.
One, Alliance Resource Partners (ARLP), is a diversified producer and marketer of steam coal to major U.S. utilities and industrial users, and the other manages coal and natural resource properties and related assets, as well as operates a midstream natural gas gathering and processing business.
Alliance Resource Partners is the U.S.’s only publicly-traded MLP involved in the production and marketing of coal. Since 1971, the company has since grown into the fourth-largest coal producer in the eastern U.S., with operations in all major eastern coalfields.
And with record sales and profits during fourth-quarter for 2008, it wasn’t surprising to see ARLP increase the company’s quarterly cash distribution. The company currently pays a quarterly dividend of 73 cents, with a sweet 9% yield.
The other MLP services electric generation utilities and steel manufacturers. For the fourth quarter of 2008, the company produced 8.7 million tons of coal compared to 7.3 million in 2007. And its quarterly record natural gas midstream system throughput volumes jumped to 324 million cubic feet (MMcf) per day from 185 MMcf per day last year.
The company currently ranks as one of my Cash Machine Top Buys, paying shareholders a 47-cent quarterly dividend, currently yielding a whopping 14.9%
For Bryan Perry’s most recent updates and buy advice on ARLP, and to find out the name of his second coal recommendation, join Cash Machine risk-free today.
