Coal Company Bankruptcies Produce Opportunities Elsewhere In Energy

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Includes: BTUUQ, FCG, FELP, GAZ, GEX, NLR, PBW, TAN, UNG, UNL, URA
by: Daryl Montgomery

Summary

Peabody Energy, once the largest coal company in the world, declared bankruptcy on April 13th.

At least seven other U.S. coal companies declared bankruptcy before it, leaving only a few that haven't.

Replacement of coal with natural gas for power generation in the U.S. has seriously damaged the industry.

Coal is toxic at the moment and should be avoided. Its problems are a plus for natural gas, nuclear and alternative energy, however.

From a U.S. perspective, it looks like the coal industry is finished. Peabody Energy (NYSE:BTU), which became the world's largest publicly traded coal company in the 1970's, declared bankruptcy on April 13th. This followed previous bankruptcy filings for James River Coal (OTCPK:JRCCQ) (April 2014), Xinergy (OTC:XRGYQ) (April 2015), Patriot Coal (OTC:PATAQ) (May 2015, July 2012), JW Resources (July 2015), Walter Energy (NYSE:WLT) (July 2015), Alpha Natural Resources (OTCPK:ANRZQ) (August 2015) and Arch Coal (ACI) (January 2016). Foresight Energy (NYSE:FELP) was downgraded from CCC- to D (default) by S&P in March because it missed a large interest payment on its debt, but it is trying to avoid bankruptcy (it was up 56% on April 13th on this news). Only a few other U.S. coal companies have avoided court filings so far.

Peabody Energy 10-Year Price History

Coal production is not about to cease in the U.S. and certainly not in the rest of world, even though many of the industry's U.S. companies have filed for protection from their creditors. The U.S. was still the second largest producer of coal in 2014 (the most recent year for which figures are available), mining 916 million tonnes (11% of the global total). China ranked number one with an output of 3748 million tonnes (47% of the total). The U.S. has the largest estimated coal reserves in the world and China is third. The U.S. is to coal, what Saudi Arabia is to oil, yet it doesn't produce anywhere near its potential.

The global picture is not as bleak for coal as the situation in the U.S. suggests. Global electricity production from coal is approximately 40%, the same as it was before the 2008 Credit Crisis. In the U.S., more electricity is now being produced from natural gas than from coal and the use of natural gas by power plants has risen considerably since 2008, while the use of coal has declined. Economics has had more to do with this than politics (although global warming advocates in the U.S. government have been relentless in their opposition to the coal industry).

Natural gas prices have been cheap for years and most U.S. power plants can switch between it and coal and although it is in plentiful supply in early 2016, this won't remain the case if this situation persists. Nuclear power is the other major competitor to coal for power generation, but its use has been capped in the U.S. because of political opposition for decades. However, the situation in the rest of the world is quite different, where a nuclear renaissance is taking place.

Power generation is only one of the two major uses of coal. The other one is industrial, steel production to be specific. Coal used for electrical production is referred to as steam coal. Coal that is used to make steel is coking or metallurgical coal. Approximately two-thirds of coal used is steam coal and one-third metallurgical. Higher carbon content coal with low sulfur content is required for industrial production. Coal is actually not a single commodity, but four related commodities. The four variations from lowest to highest heating value (and cheapest to most expensive) are: lignite, sub-bituminous, bituminous, and anthracite. The price difference between lignite and anthracite can be substantial. The coal futures contracts that trade in the U.S. are based on bituminous coal.

Investors interested in coal should stand aside, at least as far as U.S. companies are concerned. The industry is toxic at the moment. Wait to see which companies emerge from bankruptcy. The companies that mine metallurgical coal have a more promising future than the ones that produce steam coal. There is no significant competition for coal's use in steel production at the moment, whereas natural gas and alternative energy in the advanced industrial countries and nuclear power in emerging economies are likely to increasingly replace coal to produce electricity. The ETFs UNG, UNL and GAZ can be used to invest in natural gas and FCG can be used for natural gas stocks. The ETFs URA and NLR can be used to invest in nuclear power. The ETFs TAN, PBW and GEX can be used to take positions in alternative energy companies.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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