Patriot Coal Succumbs To Cheap Natural Gas

Includes: CRK, DVN, PCXCQ, RRC
by: SL Advisors

The Energy Information Agency (EIA) is a rich source of data on everything related to energy production, consumption and storage in the U.S. This chart caught my attention, showing that coal use for electricity generation continues to fall sharply, with the result that in April for the first time natural gas was used to produce as much power as coal. The price advantage and environmental issues are both helping drive natural gas consumption higher, and the EIA even projected that the U.S. will eventually become a natural gas exporter (though that time is 5-10 years away).

Meanwhile, Patriot Coal (PCX) filed for bankruptcy this week as the deteriorating economics of the coal industry proved insurmountable.

We continue to hold positions in three E&P names. Range Resources (NYSE:RRC), which stands to benefit over the long term from greater natural gas consumption since they have such large potential reserves (50-60 Trillion Cubic Feet Equivalent). Their current market cap of $9.7BN is far less than the cash they can generate if even half of this potential is realized. We also like Comstock Resources (NYSE:CRK) which we think will ultimately be acquired, although its daily volatility is multiples of the broader equity market so it's not for the faint of heart. Devon Energy (NYSE:DVN) has a better balance of oil and gas and is our third holding.

Chesapeake Energy (NYSE:CHK) has risen recently on expectations of improved corporate governance. We continue to avoid this stock. Aubrey McLendon's risk appetite is too high, and the balance sheet is too complex with forward commitments to deliver natural gas not counted as the on balance sheet liabilities they really are.

Back in April some were forecasting that natural gas prices might go negative, such was the excess supply and shortage of available storage. That was around the time prices hit their low.

Disclosure: I am long RRC, CRK, DVN.