Europe changes tune on energy security - more coal and US LNG

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Nearly four months have passed since Russia invaded Ukraine, and over the weekend Europe took its first major policy steps towards increasing energy security. Although Europe has taken several steps to reduce energy purchases from Russia, and although utilities have aggressively purchased gas (UNG) and coal (XAL1:COM) on seaborne markets, the official policy response thus far has been "more of the same." The continent has up until this point stuck with plans to reach net zero targets, the Netherlands stuck with plans to reduce coal power generation while shutting the continent's largest gas field, and Germany continues to plan for a shuttering of its nuclear power fleet (OTCPK:SRUUF).

However, over the weekend, Germany announced plans to restart mothballed coal power plants (BTU). German utility EnBW Energie signed 20-year contracts with Venture Global LNG for 1.5mtpa of US LNG supply. Austria, having eliminated coal from its power grid only two years ago, announced plans to prepare mothballed coal power stations for operation. And the Netherlands activated an "energy crisis plan" which calls for removing caps on coal fired power generation and producing 2.8bcm of gas from Groningen in 2023, versus prior plans to close the field entirely (XOM) (SHEL).

Seaborne coal prices have rallied ~10% from the time futures opened Monday in Asia, while European natural gas prices have rallied ~8% over the same period. Investors are likely to benefit from owning shares in companies able to sell energy into Europe (CVX) (TTE) (LNG), as the Kremlin attempts to reestablish control over European energy markets. However, with coal stocks trading at historically discounted valuations, while seaborne coal prices trade near record highs, and the world's foremost net-zero policymakers shift towards coal, it may be that the coal sector stands to benefit the most from upcoming results and contract announcements.