President Obama has announced new efforts to combat climate change, many of which will be directed at limiting the use of coal. That’s a headwind for the coal industry, but new rules won’t be as detrimental as many think.
A Useful Point
For example, the U.S. coal fired fleet is running at about 55% of capacity, according to coal miner Peabody Energy Corporation (NYSE:BTU). The company is expecting around 60 gigawatts of coal generation to be shuttered by 2017, reducing coal demand by 70 million tonnes. The plants being retired are the oldest, least efficient, and dirtiest. Any demand loss from a plant being closed could easily be made up by higher usage at a plant that remains open.
Peabody Energy Corporation (NYSE:BTU) estimates that every one percentage point change in utilization is equal to 15 tonnes of coal. Utilization would need to increase less than 5% to offset the 70 million tonnes lost to expected utility closures. Going from a 55% utilization rate to a 60% rate isn’t a very big change.
Note, too, that as natural gas prices have moved higher, gas use has fallen and coal use has increased. Through the first four months of the year, Peabody Energy Corporation (NYSE:BTU) estimates that gas use fell by 14% while coal use increased by 11%. Unless gas prices collapse again, coal is increasingly competitive as a fuel source, which supports utilization rates.
One of the best options for income investors is Alliance Resource Partners, L.P. (NASDAQ:ARLP). The company’s mines are predominantly located in Northern Appalachia and the Illinois Basin. Coal mined from these two areas tends to be very low cost, competing with gas priced as low as $3.
That’s part of the reason why Alliance Resource Partners, L.P. (NASDAQ:ARLP) was able to increase production in each of the last four years, with plans for another increase in 2013. Revenues have been similarly strong, with production increases offsetting lower coal prices. So, even though the coal industry is going through a particularly difficult period, Alliance Resource Partners, L.P. (NASDAQ:ARLP) is putting up record results.
Income investors looking for a coal play will appreciate the company’s around 6.4% dividend yield and long history of dividend increases.
Peabody Energy Corporation (NYSE:BTU) is another good option, though it hasn’t been performing as well as Allied. Indeed, the company’s top-line has grown steadily over the past few years but softened notably on a year-over-year and sequential basis in the first quarter. As a point of reference, Alliance Resource Partners, L.P. (NASDAQ:ARLP)’s top-line was essentially flat sequentially, but still up on a year-over-year basis in the first quarter.