Could Natural Gas Mark the End of Coal?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
April of this year marked an incredible turning point for natural gas and for coal. Five months ago was the first time that the power output of natural gas matched the output of coal. This is important because coal is the largest generator of electricity in the world.
On the downside, coal releases more carbon dioxide than petroleum, and it releases twice as much as natural gas, according to the Energy Information Administration.
This year, natural gas prices have taken a nose dive. Natural gas prices hit the mid- $10 range in the summer of 2008, but have faltered since. This year has been particularly rough, with gas prices hitting a low of $2.30 per million BTUs (British Thermal Units) and now trading around $3.00. The low price point has allowed companies with diesel trucks to switch over to natural gas as a power source. Despite the low prices, however, companies continue to keep digging for even more natural gas.
Who Is Hurt?
Take a look at the Marcellus Shale in western Pennsylvania, just south of Pittsburgh. All of the land is getting snapped up quickly by oil and gas companies and private investors. The buying spree has been going on since the mid- 2000s, but companies seem to keep purchasing. In fact, some companies are still hiring landmen – the researchers who go to county courthouses to find out who owns land and drilling rights in different locales.
Once oil and gas companies buy the natural gas rights, they either hold the rights or they begin to drill. The drilling process, known as hydraulic fracturing (fracking), uses pressure to increase cracks in rock formations so the gas can be captured.
Companies just can’t seem to help themselves from obtaining more and more natural gas. Chesapeake (NYSE: CHK) and ExxonMobil (NYSE: XOM) have been hurt by this phenomenon. They have watched natural gas prices decrease somewhere in the neighborhood of 80% in the past four years, and their bottom lines have felt this pressure. However, their oil businesses have been able to offset this decline, as the natural gas game right now is a game of low prices and high volume.
That high volume is what is hurting coal companies. Peabody (NYSE: BTU) and Arch Coal (NYSE: ACI), for example, are losing market share to natural gas. Peabody is trading just under the $21 mark, but it has traded as high as $49.46 within the past 52 weeks. The company trades at a decent price to earnings ratio of 6.5 and a forward earnings ratio of 8.0.
Arch Coal isn’t doing any better. Arch lost $1.68 per share, which is significant considering that the company is trading at only $5.16 per share. Arch traded as high as $20.83 within the past 52 weeks, but has steadily declined since last October and has fallen off a cliff since this past February. Indeed, the future for coal stocks does not look bright with natural gas prices so low.
The Solution
The downside is that there does not appear to be a solution in sight for coal stocks. The competition between coal and natural gas is too fierce. Both can be used for generating electricity and heat, and natural gas prices are just too low for coal to be able to compete.
There is a solution, however, for natural gas companies. The firms can liquefy and export the natural gas to nations where the commodity is overpriced. Building out export terminals and obtaining transportation will be key if companies like ExxonMobil and Chesapeake ever hope to boost their margins from natural gas. But the Department of Energy controls the outcome.
This fall the Department of Energy will meet to decide how many new export terminals to allow, and coal and natural gas companies will be eagerly watching from the sidelines. For both coal’s price and natural gas’ price sake, let’s hope that the DOE lets companies get rid of that excess supply of natural gas.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. 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.
