Peabody Energy Corporation (BTU), Arch Coal Inc (ACI): Now Is the Time to Focus on Coal Companies

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Peabody Energy Corporation (NYSE:BTU)Coal remains unloved because it is considered a dirty fuel. However, changes in the market are beginning to alter the fuel’s outlook for the better. It’s time to rethink the industry.

The invisible hand

Markets are guided by a so-called invisible hand in which reasonably rational individuals do what is in their own best interests. In the end, supply and demand come together to create a working ecosystem. That’s happening to coal in spades.

New methods of drilling for natural gas overtook demand for the fuel and led to a steep price decline. That led utilities, the largest users of coal, to switch to gas as a fuel source to keep costs down. Coal demand and pricing fell as a result. The coal industry reduced production and refined operations as a result.

Natural gas prices, however, were so low that drillers couldn’t make money drilling. Natural gas drilling has, thus, slowed. That has pushed gas prices notably higher to the point where the choice between coal and gas as a base load fuel is no longer tilted in favor of gas.

The invisible hand is an incredible thing. And there are other long-term positives for coal, too.

New and old

Peabody Energy Corporation (NYSE:BTU) recently noted that it expects new coal fired power plants built around the world to increase coal demand by 1.4 billion tonnes by 2017. However, that positive is offset by the fear of U.S. government regulation forcing older domestic plants to shutter. Only Arch Coal Inc (NYSE:ACI) highlights that U.S. coal fired power plants operated at 73% of capacity in 2007, but at just 54% last year. So, any closures could easily be made up by demand from increased utilization.

Increased utilization is a price issue as utilities look for the lowest cost fuel source. Coal and natural gas will continue to vie for market share, but the negative trends in coal appear to be abating. And it looks like a few solid long-term positives are lining up. Now is the time to start looking at coal, even though 2013 could be another difficult year.

The global player

Peabody Energy Corporation (NYSE:BTU) is one of the largest U.S. coal miners, but it has a global profile. Notably, it has operations in Australia which allow it to easily provide coal to Asia. Coal demand in China and India is increasing rapidly, so this is a key long-term benefit.

The company remained solidly profitable until 2012, when profits fell dramatically. However, the loss is largely the result of one-time costs, including non-cash asset impairment charges. Without those charges, the company would have earned over $2.60 per share. This explains why, despite the difficult year, the company didn’t cut its dividend. As the coal market improves, Peabody Energy Corporation (NYSE:BTU) is well positioned to take advantage of the recovery.

It offers a yield of around 1.80%, relatively low on an absolute basis, but high for Peabody Energy Corporation (NYSE:BTU).

Number two

Arch Coal Inc (NYSE:ACI) is another large U.S. coal producer. It doesn’t have the global assets of Peabody Energy Corporation (NYSE:BTU), but is working to expand its ability to export coal from the United States to the countries where demand is increasing most quickly.

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