Let’s face it: this is a horrible time to be a coal miner! Cheap natural gas has kept domestic U.S. demand in the dumps, and now even exports of U.S. coal are expected to decline by as much as 25% during 2013. Alpha Natural Resources, Inc. (NYSE:ANR) paid $7.1 billion for rival Massey Energy roughly two years ago, and today the combined company retains a market capitalization of just $2 billion! Poof! Cliffs Natural Resources Inc (NYSE:CLF) continues to sell its metallurgical coal at a loss even after some welcome cost improvements, and the shares of major producer Arch Coal Inc (NYSE:ACI) are still reeling from a huge fourth-quarter miss. CONSOL Energy Inc. (NYSE:CNX) seems about the only operator standing on solid ground, but that’s more a natural gas story than it is about coal.
Forced as they are to adapt to these crushingly anemic near-term market conditions, even the top operators in the industry are facing enormous challenges. But while it’s unquestionably an agonizing time to be a coal miner, I believe it’s ultimately the right time to be a coal investor. In particular, I think the shares of Peabody Energy Corporation (NYSE:BTU) offer a compelling and timely opportunity to get into position for what continues to shape up as a meaningful long-term increase in global demand for both thermal and metallurgical coals. The deeper the near-term malaise grows, I maintain, the more attractive Peabody looks as a target for long-term exposure to the global growth story for coal.
Accordingly, I’ve authored a premium research report that presents my bullish long-term investment thesis for Peabody Energy, and I strongly encourage readers to access the full report from The Motley Fool by clicking here. To get you started, I’m offering a sneak-peak below at one section of the report, where I paint the nature of the opportunity with broad strokes. Please enjoy the following excerpt:
Oil is about to cede its long-held position as the world’s leading energy source, and the fuel that’s set to take its place may surprise you. According to the energy experts at research firm Wood Mackenzie, coal will overtake oil – sometime during the year 2013 – as the world’s largest energy source. The 1.3 billion tons of fresh global coal demand that’s expected to emerge by 2016 equates to more than five times the entire 2012 sales volume of the world’s largest private sector coal company: Peabody Energy.
With an enviable suite of operations that is best positioned to efficiently supply this major growth market, Peabody Energy makes an extremely compelling selection for long-term capital appreciation. But before we dive into the specific strengths that set Peabody apart from its peers, we must first unravel the myths of a misunderstood coal market.
Step 1: Understand the future of coal
U.S. investors may be particularly susceptible to perpetuating a myth of coal’s secular decline. After all, their particular energy sector has undergone rapid structural changes in recent years, dominated by the storied explosion in natural gas production capacity. But there is more to the domestic U.S. coal story than meets the eye, and in any event the astounding scale of looming demand growth from China and India more than suffice to offset the damage.
The U.S. coal market will continue to face headwinds, including a projected 20-million-ton decrease in the amount of coal used for electricity generation between 2011 and 2016. But within that relatively modest net decline hides a fascinating tale of vastly differing outlooks between select coal regions (called “basins”). Peabody Energy projects a 50-million-ton increase in coal demand by utilities likely to source coals from the Southern Powder River Basin (abbreviated “SPRB”) and the Illinois Basin (abbreviated “ILB”) combined, compared with a 70-million-ton decrease in utility demand for the nation’s remaining coal basins.