Coal: The Fastest Growing Fossil Fuel

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coal may be unloved in the United States, but the rest of the world seems to like it well enough. BP's annual World Energy Review states that “Coal remained the fastest-growing fossil fuel.” Despite the negative press, investors should be looking at the space.

A Record Year

BP's review notes that “Coal reached the highest share of global primary energy consumption (29.9%) since 1970.” So, it is also increasing its share of the energy market. Demand has come from new power plants in China and India.

Peabody Energy (NYSE: BTU) is expecting these two nations to account for around two-thirds of the demand growth for coal over the next few years. Putting numbers on that, Peabody believes China will increase coal imports by 200 to 250 billion tonnes between 2011 and 2016, with India slated for a 100 to 150 billion tonne increase.

The Opportunity

Increasing coal demand will mean more business for coal companies in the near future, particularly for exporters and those with properties in Australia. To highlight the point, the U.S. Energy Information Information Administration recently announced that the United States set a coal export record in March.

Peabody is one of the best positioned to benefit. While it has material operations in the U.S. market serving domestic power companies, it also has a big position in Australia. That country's proximity to Asia is a huge strategic benefit because it helps to reduce shipping costs.

While low natural gas prices in the U.S. market and slower growth in China have taken a toll on coal prices, Peabody was able to grow its top-line in each of the last three years and increased its dividend twice. Sales have fallen off sharply so far this year, but that is actually a sign of a healing coal market.

Notably, in the face of a weak coal market, many companies have been shutting production. That helps reduce supply and supports prices. And natural gas prices have been heading higher, too, leading U.S. electric plants to switch back to coal. That's reducing U.S. stockpiles, another supportive shift.

This year will be a transition year for coal, but Peabody is one of the best companies in the space. Although the around 2.3% dividend yield isn't high on an absolute level, it's pretty high for Peabody. There's plenty of turnaround appeal here.

More Reasons to like Coal

Another reason to like coal is the fact that Kinder Morgan Energy Partners (NYSE: KMP) has announced plans to start buying coal lands to lease out to miners. Kinder Morgan is one of the largest mid-stream energy investors, owning the infrastructure that gets oil and natural gas from the ground to where it's needed.

The top- and bottom-lines can get complicated because of the partnership tax structure, but this industry giant has increased its distribution on a regular basis for more than a decade. That's the real sign of strength that investors should be watching. With a broadly diversified business to support the coal push, this partnership is a decent way for conservative investors to inch into the coal market. And it already owns coal exporting terminals, so coal isn't a completely new area for the partnership.

The best part is that Kinder Morgan yields around 6.1% and has a history of successfully pulling off opportunistic acquisitions. Even if this coal shift doesn't pan out well, there's no reason to expect the units to suffer for it.

More Aggressive

A more aggressive way to play a coal rebound is Alliance Resource Partners (NASDAQ: ARLP). This partnership owns and works its own coal mines. Its main focus is serving the domestic energy market. While that means it won't be a direct beneficiary of foreign demand, it does put it in prime position to benefit from a rebound in coal prices.

What sets Alliance apart from the competition, however, is the fact that it has posted record results despite the weak coal market. It expects to do that again in 2013. Continuing to invest in its coal business and boosting output are two key factors here, but so too is the company's ability to gain market share.

About 95% of its coal production comes from Northern Appalachia and the Illinois Basin, where coal can compete with natural gas priced as low as $3. Even in a transition year, Alliance should prosper. This coal-focused limited partnership yields around 6.4% and has a long history of regular dividend increases. More aggressive income investors should like the growth potential here.

A Tough Year

There is no question that 2013 is going to be another tough year for coal. However, there are signs pointing to an eventual turnaround. Peabody is one of the best positioned in the industry to benefit both from Asian demand and improved global pricing. Kinder is a way to partner with an opportunistic investor just getting into the space. Alliance, meanwhile, is a high-yielding play on a company prospering despite coal's malaise.

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Reuben Brewer has a position in Kinder Morgan. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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