In the WSJ's Heard on the Street column today (paid sub. req'd), Gregory Zuckerman lays out the argument for Consol Energy and other high sulfur coal producers. Key points:
- High sulfur coal was previously undesirable due to pollution caused when burning it. But many electric utilities have installed "scrubbers" which remove sulfur fumes.
- Once the pollution problem is removed, high sulfur coal is more economical than low sulfur coal because it is frequently located closer to power plants and burns hotter.
- The most obvious stock beneficiary is CONSOL Energy Inc. (NYSE: CNX), which get about two-thirds of its coal from Northern Appalachia, a high sulfur region. CNX is the second largest coal producer by revenue. Utilities Duke Energy (NYSE:DUK) and American Electric Power (NYSE:AEP) are already starting to use high sulfur coal from CNX.
- Consol trades at about 17x 2006 estimated earnings and 13x 2007 estimated earnings.
- Peabody Energy Corp. (NYSE:BTU), the largest coal producer, trades at a forward estimated 2006 P/E of 27 and 2007 estimated P/E of 17.
- Other stock plays on high sulfur coal: Foundation Coal Holdings Inc. (NYSE:FCL) and Alliance Resource Partners LP (NASDAQ:ARLP).
- The switch to high sulfur coal could hit some non-high sulfur coal producers such as Massey Energy (NYSE:MEE).
Quick comment: Other coal stocks not mentioned in the article include Arch Coal (ACI), Alpha Natural Resources, Inc. (ANR), BHP Billiton (NYSE:BHP), Headwaters Inc. (NYSE:HW), Westmoreland Coal Company (AMEX: WLB), and Chinese company Yazhou Coal Mining Co. (NYSE:YZC).