Coal demand and prices have fallen off a cliff since the latter part of 2011, as record low natural gas prices (and abundant supply, which has outstripped the demand) have induced power plants and those with the capabilities to switch between the two to take advantage of these lower input costs.
The general market consensus seems to be that coal will be especially weak through at least 2014. I think prices will be higher sooner rather than later. Here's why.
1. Although natural gas supplies are bulging as fracking (the process of extracting the gas from shale rock) and drilling continue at a breakneck pace, producers such as ConocoPhillips (COP) and Anadarko (APC) have stated that they will be pulling back on production. They know that natural gas prices falling below $2 will be unable to sustain the costs of extraction over a longer period of time. It is in the best interest of these companies to make sure natural gas doesn't fall too far.
2. Although this is pure speculation on my part, I think that politics will play a role this November. If I am right and President Obama is re-elected with the Democrats gaining seats in the House, I think new regulations will be imposed on fracking and the natural gas industry, especially if a disaster happens, which is entirely possible, given the nature of the process and the amount currently taking place.
3. Although some estimates place the amount of natural gas in the U.S. at 70-80 years worth of consumption, there are other estimates that are closer to only 30-35 years worth of the stuff. Since the science of estimation on natural resources extracted from the ground is a highly educated guesstimate, we can use these two estimate ranges to presume that if the former is right, the price of natural gas will probably be low for quite a while. If the latter is correct, that would be a long term catalyst for coal prices. While it is most likely that the U.S. has more than 35 years of natural gas beneath the surface, I would hesitate to be giddy in regards to a 70 or 80 year supply estimate. While we may very well have amounts to support such a time frame, there are a couple of questions that I have that I can't seem to find an answer to. How easy will it all be to extract? If you haven't noticed already in the oil and gas industries, the easy stuff is extracted out of the ground first. Is the gas all easy to get to? I would be surprised if it is. Also, if the gas can be extracted easily, but the exploration and drilling infringes on public lands or a sizeable portion of the population, will the American people be accepting of such developments?
While 2 & 3 are not certainties by any means, I think they are reasonable considerations. With that being said, here are 3 coal plays to research further if you think that prices will be on the rise sooner rather than later. Also, in case prices don't rise, there is some income to be had in the meantime with these picks (except one).
Arch Coal (ACI) - The second largest producer of coal by volume, ACI is well placed with mining operations in every major coal basin of the U.S. With a manageable debt load (although I would prefer to see the debt/equity ratio lower still) and a dividend yield of 4.3%, ACI is in a good position to weather out the storm and benefit when the clouds clear.
Alliance Resource Partners LP (ARLP) - With 10 underground mines operating in the Appalachias and the Illinois Basin, ARLP has close to 1 billion tons in proved and provable reserves. Since it is an MLP, distributions are on a quarterly basis. Although distributions received in the prior year resulted in a 7.1% yield at the current price, I would expect the distributions to be down due to the current environment. Still, I think they will be quite satisfactory for investors, especially those seeking income in comparison with low-yielding alternatives.
Alpha Natural Resources (ANR) - ANR has mining operations in several states with a total of owned and leased reserves of 4.7 billion. ANR also has some flexibility due to its capital structure being comprised of around 40% debt compared to many competitors that have debt greater than 100% of equity. This is something to keep in mind when doing you research.