Coal is one of the most plentiful and least expensive sources of energy on Earth. That’s the good news. The bad news is that it’s dirty compared to other fuel options like increasingly popular natural gas and renewables. Utilities, however, also consider price when making fuel choices, so the cleanest fuels don’t always win the day.
This is why coal use was up about 5% in June, year over year, and natural gas use was down around 16%, according to The Energy Information Administration (EIA). As Cloud Peak Energy Inc. (NYSE:CLD) noted in its second quarter earnings release, “…natural gas prices have remained at a level where most plants consuming PRB coal are economically able to dispatch coal.”
To provide a comparison, the EIA notes that it cost utilities about $3.93 per million Btu (mmBtu) to burn Henry Hub natural gas in June. Coal giant Peabody Energy Corporation (NYSE:BTU) estimates that PRB coal is competitive with gas priced in the $2.50 to $2.75 per mmBtu range. ILB coal can compete with natural gas in the slightly higher $3.25 to $3.50 per mmBtu range. With natural gas in the $3.60 area, both PRB and ILB coal are competitive today.
Peabody Energy Corporation (NYSE:BTU) has notable exposure to both regions, but Australian operations account for nearly half of its revenues. So, Peabody Energy Corporation (NYSE:BTU) is a great diversified coal miner, but it doesn’t allow you to hone in on the two “sweet spots” in U.S. thermal coal. For that, you need to look at Cloud Peak Energy Inc. (NYSE:CLD) or Alliance Resource Partners, L.P. (NASDAQ:ARLP).
Focused on cheap coal
Cloud Peak Energy Inc. (NYSE:CLD) is focused almost exclusively on the PRB area. That puts the company in prime position to benefit. That said, utilities have been burning their coal stockpiles instead of ordering new coal, so Cloud Peak Energy Inc. (NYSE:CLD) is expecting coal volumes to be flat year over year in 2013. Add in lower coal prices, and this year is destined to be a difficult one even if demand picks up from here. Next year, though, should see much easier earnings comparisons as the coal market stabilizes.
An industry leader
The ILB, meanwhile, accounted for over 80% of the coal that Alliance Resource Partners, L.P. (NASDAQ:ARLP) mined in 2012, making it a focused investment on that region. Interestingly, however, while other coal miners have been cutting back production and shutting mines, Alliance Resource Partners, L.P. (NASDAQ:ARLP) has been increasing production. For example, in the first half the partnership sold about 19.5 million tons of coal compared to 16.5 million in the first six months of 2012.