Buy Coal as US Coal Exports Grow
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coal has a negative reputation as dirty fuel leftover the industrialization age. With the advent of cheap natural gas U.S. utilities are turning to natural gas as the low coal consumption in 2012 shows. Regardless, natural gas is starting to stage a turn around. In the midst of all of the hype investors ought to take a look at the long term picture. Increasing natural gas prices will help push coal higher. Over the past 5 years US coal exports have continued to increase while the latest numbers only confirm this trend. Even though natural gas has grown in popularity coal still remains an important part America's electricity generation. Coal will not fizzle out tomorrow and the strong export numbers show that the strongest companies in the industry will be able to thrive even in midst of America's fracking boom.
Why U.S. Coal Exports are Increasing
Coal is much easier to export than natural gas. Placing a ship full of coal and sending it over to Europe is much easier than building an LNG facility, charting an LNG carrier, then using another LNG facility to return the natural gas to its gaseous state. While renewable energy is a very important long term factor in the evolution of the world's energy portfolio it will not replace all non-renewables by 9:00AM tomorrow morning. The world has started to reconsider nuclear energy with the recent Fukushima disaster. All of these factors coupled with Europe's desire to not give Russia any more leverage with their natural gas resources makes the recent increase in US coal exports to Europe completely understandable.
Where to Invest
Peabody Energy Corp (NYSE: BTU) is one of strongest thermal coal miners. They have operations in the United States and Australia. While their Australian interests will place somewhat of a drag on earnings due to China's cooling economy and Australian carbon taxes, BTU remains a strong firm. Their debt load is reasonable with a total debt to equity ratio of 1.09. Their gross margin of 29.7% is healthy but the profit margin of 7.1% is significantly lower than that of ARLP. Their PE ratio of 11 is attractive considering their market cap of only $7.8 billion.
Alliance Resource Partners, L.P. (NASDAQ: ARLP) is a great coal miner, but the tax complications given by its status as an MLP may reduce its attractiveness. They boast a gross margin of 31.9% and a profit margin of 16.90%. Similar to BTU their total debt to equity ratio is only 1.07. They have facilities throughout the Appalachia and Illinois basin. The latest quarter has seen increasing volumes and decreasing EBITDA per ton costs. Investors willing to deal with tax complications of a MLP will find Alliance as a very attractive investment.
CONSOL Energy (NYSE: CNX) is not a strict coal play. They have significant natural gas and coal resources in North America. Their total debt to equity ratio of .84 is lower than BTU and ARLP. Their PE ratio is much higher at 18.8, but given their mix of coal and natural gas assets this is somewhat understandable. Their interests in Marcellus, Utica, and other shale formations exposes CNX to the anti-fraking movement throughout various states. With a gross margin of 34.7% and a profit margin of 7.8%, Consol is very similar to Peabody.
Market Vectors Etf Coal ETF (NYSEMKT: KOL) may appear like a good investment, but it is limited by the high percentage of assets devoted to the Asian market. Yanzhou coal mining, China Shenhua, and China coal are all within the top ten holdings of the ETF. This exposure to the Chines market and China's transition to becoming less dependent on fixed investment decreases the attractiveness of the ETF. As of September 30 the fund has an average PE ratio of 9.66 and a reasonable expense ratio of .59%. Regardless, China's current difficulties and the large amount of Asian exposure in this ETF reduces its attractiveness.
Rising coal exports in the midst of increased natural gas demand is a sign that the coal industry will maintain its strength over the coming years. The U.S. consumes much more coal than it exports, but miners will be able to send extra coal overseas. Many nations are net coal importers and the difficulty and high cost to export natural gas will help to ensure the use of coal as an energy source. While America continues to switch to natural gas, U.S. coal miners offer an important resource for the domestic and international economy.
MrCanadian1 owns shares in Peabody Energy Corp. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.