Coal Investment Opportunities

Includes: CSX, KOL, NSC, UNG, UNP
by: Energy and Capital

By Jeff Siegel

Coal state politicians must be getting worried...

Unable to swim against the rising tide of dirt-cheap natural gas, the coal industry is losing ground in the domestic power generation game.

And let's face it; without old King Coal, guys like Representative David McKinley (R-WV) and Senator Joe Manchin (D-WV) will be hard-pressed to come up with the kind of scratch they need to win elections.

But is the coal industry really heading towards life support? I wouldn't be so sure.

Here in the United States, coal-fired power generation is getting about as much love as Rick Santorum at a gay pride rally. In fact, in the first quarter of 2012, coal only made up 36 percent of U.S. electricity.This is a far cry from the nearly 50% control the coal industry had as recently as 2008.

Also during this quarter we saw natural gas accounting for 28.7% of U.S. electricity — an 8% increase from Q1 2011.There's no doubt about it; natural gas is well on its way to replacing coal as the dominant source of power generation in the U.S. But that doesn't mean the coal industry will go the way of the typewriter...

The Most Bang for Your Buck

In the world of energy, I've seen pretty much every possible prediction scenario — from a world powered exclusively by solar and wind to claims that we have enough oil in the U.S. to end all imports for good.

These kinds of extreme predictions are nonsense. They're about as reliable as Chinese drywall. The fact is, here in the United States we are blessed with robust energy resources. Whether wind, coal, natural gas, solar, oil, or geothermal, we are so well-diversified there's absolutely no need to put all of our energy eggs in one basket.

And we don't.

That being said, the energy source that gives you the most bang for your buck will always take the lead. This is why I predict that by 2020, natural gas will supply no less than 40 percent of our power generation. Due primarily to increasing regulatory hurdles and cheaper natural gas, coal will supply about 20 percent, with nuclear maintaining around 20 percent and renewables picking up the rest.

Currently about 14 percent of total U.S. energy comes from renewables. Most of this is hydro, although wind and solar will experience the lion's share of growth over the next eight years.

While I do expect to see coal's contribution fall by more than 15 percent by 2020, I also expect to see massive growth in coal exports.

Export This!

As I wrote last year, almost 15 percent of all globally-traded coal ends up in China. That figure is expected to rise even further. Meanwhile, the U.S. has little interest in expanding its coal-fired power generation, but we're also the world leader in coal reserves.

It doesn't take a rocket scientist to see where I'm going with this...

We already know that a half-billion-dollar marine terminal in Bellingham, Washington, will soon be the destination for at least nine coal-filled freight trains that'll run back and forth daily from Wyoming and Montana. And while there is certainly plenty of opposition, I fully expect to see this thing go through.

Interestingly, the EPA announced last month it wants the Army Corps of Engineers to do a review of the impacts of exporting U.S. coal through Northwest ports. My guess is that this is just a formality. The EPA already has enough critics for enforcing regulations on coal-fired power plants. It's not going to seek out more opposition by putting the kibosh on port development for exports.

I suspect the EPA prefers to support shipping our coal bounty overseas to the highest bidder instead of burning it here, anyway...

With six planned coal export projects already being planned in the Northwest, it looks like the coal industry is simply adapting to a new domestic energy economy. It will be just fine.

Although I'd be more interested in picking up some rail plays on dips to take advantage of this opportunity: companies like CSX Corp. (NYSE: CSX), Norfolk Southern Corp (NYSE: NSC), and Union Pacific (NYSE: UNP).

And on the power generation front, I'm all over natural gas — particularly the picks-and-shovels companies that are facilitating the rise in natural gas power generation.