Although coal use increased in the first quarter at utilities, coal sales fell because energy companies dipped into their stockpiles to meet their fuel needs. Stockpiles are now below their five year average, according to the U.S. Energy Information Administration (EIA). Although 2013 is a transition year, this dynamic should set up rising demand for companies like Peabody Energy Corporation (NYSE:BTU), Arch Coal Inc (NYSE:ACI), and Alliance Resource Partners, L.P. (NASDAQ:ARLP).
Unloved but Still Needed
Coal is an unloved natural resource. However, it still powers around 40% of this country’s electric plants. It is abundant and relatively inexpensive. The drop in coal demand has been driven by a fall in natural gas prices, a trend that has started to reverse. Coal use was up 11% year over year in the first quarter according to the EIA.
That jump in demand, however, was filled by tapping into utility stockpiles, not buying more coal. So the coal miners are still suffering. That said, utilities can only go down this route for just so long before they need to start buying more coal to burn and to replenish their diminishing stockpiles. While that tipping point hasn’t been reached just yet, investors looking for a catalyst in an out of favor industry should watch this trend carefully.
Those intrepid enough to buy in today should consider:
Still Performing Well
Alliance Resource Partners, L.P. (NASDAQ:ARLP) has increased production in each of the last four years despite the weak coal market. It plans on another production increase in 2013. Revenues, meanwhile, have been similarly strong, as production increases have offset lower coal prices. So, despite the industry’s problems, Alliance Resource Partners, L.P. (NASDAQ:ARLP) is putting up record results and expects to continue to do so.
Part of the company’s strength comes from its low-cost mines, which it believes can compete with natural gas priced as low as $3. And Alliance Resource Partners, L.P. (NASDAQ:ARLP) is expanding its operations in its core Northern Appalachia and Illinois Basin mines, which should only make it that much stronger of a company.
Alliance Resource Partners, L.P. (NASDAQ:ARLP) is easily one of the best positioned coal miners today. Income investors looking for a coal play should look no further than Alliance Resource Partners, L.P. (NASDAQ:ARLP) and its around 6.1% yield and long history of distribution increases.
Big, With Issues
Arch Coal Inc (NYSE:ACI) is one of the largest coal miners in the United States. It had been solidly profitable until 2012 when a non-cash impairment charge led to a steep loss. That charge, however, was “due to the decline in benchmark metallurgical coal prices versus 2011.” In other words, it had to write down the value of its inventory.