U.S. Coal Production: Peabody and Arch Coal

By Maxxwell A.R. Chatsko - January 21, 2012 | Tickers: ACI, CNX, BTU | 0 Comments

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This is the second article in the Total U.S. Energy Production series. Today we will look at coal’s place in our energy picture and assess the roles of several coal producing companies.

Coal

Coal has produced the largest share of total U.S. energy every year since 1983, but it’s nearly three decade reign officially ended last year when it was eclipsed by natural gas. That being said, coal still has an enormous lead over any other source of energy. Given our lack of domestic crude oil (16.00% of 2010 production) reserves and the recent falling-out of nuclear energy (10.67%) there is really no true contender for second place. That tells you that it’s important, but doesn’t paint a very clear picture of how coal is used. Therefore, I think it makes more sense to look at coal’s place in total electricity generation from 2010:

It’s Raining Coaled-Hard Facts In Here

Not even natural gas challenged coal when it came to generating watts. Some quick statistics for America’s “on-switch”:

• In 2010, 93% of all coal produced in the United States was used to generate electricity.
• The United States owns 27.5% of the world’s coal, next to Russia (18.3%), and China (13.3%).
• The United States has 261 billion short tons of “Recoverable Reserves”, which are recoverable based on today’s mining technology and logistical factors (the coal is under a school, for a silly example). By extrapolating the 1.1% growth rate in consumption it can be calculated that the United States has enough coal for 119 years. I like our chances.
• The United States has 486 billion short tons of “Demonstrated Reserves”, which represent coal that can be mined at any point in the future and don’t care about lousy schoolhouses.
• The amount of coal one American miner can produce in one hour has more than tripled since 1978.
• About 71% of all coal produced in the United States will be transported by railroad.

The United States Energy Information Administration projects coal production will continue to grow steadily for the next several decades. Although coal will continue to be widely used in electricity generation it may lose ground to the cleaner burning natural gas. The EPA doesn’t breathe down your neck for emissions, no one sets up a picket line in front of your mines, and you can claim that you’re helping the environment and put pictures of wildlife all over your website. Therefore, coal investors should position themselves to capitalize on the next most popular use of American coal: as an export. Below are the two largest American coal producers with extensive export capabilities and a coal/natural gas wild card company.

Peabody, Anybody?

Any proper discussion about coal must include Peabody Energy Corp. (NYSE: BTU), which is the world’s largest private-sector coal company. In 2010 Peabody produced 246 million tons of coal and is expected to produce north of 268 million tons in 2011. The company accounted for 10% of total U.S. electricity generation in 2010 – more than all domestic hydroelectric, geothermal, wind, solar, and biomass generation combined. In fact, Peabody accounted for 2% of world electricity generation in 2010. “Go green!” doesn’t really measure up after that.

The (Blackn)Golden Arches

In 2010 Arch Coal Inc. (NYSE: ACI) produced about 16% of the total United States supply. That is impressive, but the company’s 179 million tons in 2010 is still far behind Peabody. Nonetheless, Arch Coal provides an interesting snapshot of the entire coal industry. As with most things energy the coal supply was effectively strangled in 2009 due to the recession. While companies are working hard to pick up production there are still supply constraints throughout the industry – exacerbated by a growing China and India. Arch has been steadily positioning itself to capitalize on these trends and looks to continue profiting in the meantime. Exporting cleaner, low-sulfur coal has become one of the company’s top priorities.

CONSOL Energy’s Coal

As I mentioned in my previous article about natural gas (link above) I am a big fan on CONSOL Energy (NYSE: CNX). The company is positioned in the heart of the Appalachian coal region and the Marcellus Shale. CONSOL is making tremendous strides as a coal powerhouse (5^thlargest coal company in 2009) and a natural gas leader (investing more money in natural gas than coal in 2012). That allows for a unique play in the two largest sources of energy production in the United States. It could be a sweet long-term play should coal continue to lose ground to the cleaner burning and overly abundant natural gas, which we will discuss in detail in a future article.

Proven and Probable Coal Reserves:

CNX 4.5 billion tons < ACI 5.5 billion tons < BTU 9 billion tons

Social Costs of Coal

Investors looking to get into coal companies, which are near 52-week lows across the board, may or may not consider the environmental impact of coal. It goes without saying that mining coal is not a very environmentally friendly process. Therefore, it should be no surprise that coal companies such as Peabody and Arch have adamantly opposed environmental regulation for decades. Peabody was the major opposition against both the Clean Air Act of 1970 and 1990, while Arch is a major offender when it comes to mountaintop mining. Of course, there are dozens of companies in the industry that subscribe to similar practices. I am not trying to paint a negative picture of the industry, but I feel investors should be reminded of the social costs of their profits.

There is no denying that emissions from dirty fossil fuels have had an enormous impact on healthcare costs. According to the Asthma and Allergy Foundation of America asthma affects 20 million Americans and costs $18.3 billion per year. Due to environmental regulations the United States boasts one of the safest, cleanest, and most efficient coal industries in the world. In fact, Peabody and Arch are among the biggest investors in clean coal, coal gasification, and coal liquefaction technologies. Arch’s website offers a quick summarization of the efficiency of the industry:

The use of coal to meet America’s electricity demand more than tripled between 1970 and 2009. But thanks to investments in clean coal technologies, emissions of criteria air pollutants (those defined by the Clean Air Act as having a negative impact on human health) declined by more than 65% during that same time period, according to the U.S. EPA, and, thanks to improved technology SOx and NOx emissions are expected to decrease an additional 50% between 2007 and 2020.

Similar to my thoughts on the United States’ role in the liquid natural gas industry, I believe the United States can become a leader in clean coal technologies.

Coal as an Investment

I think many coal companies are sitting at attractive valuations right now. Given the importance of coal in our national energy picture any one of these companies may be a good long-term investment. One word of caution: put production numbers for this year and previous years in context. Remember, 2009 was a horrible year for energy consumption and production. A company boasting that they increased production X% may not be as impressive as you think.

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on coal and energy @BlacknGoldFool.

BlacknGold

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