Electric utilities care about price more than fuel source, so natural gas and coal use will continue to seesaw back and forth for years. You can protect yourself by buying companies with exposure to both commodities like CONSOL Energy Inc. (NYSE:CNX), Natural Resource Partners LP (NYSE:NRP), and PVR Partners LP (NYSE:PVR).
The Future Is Variable
In a recent presentation, Alliance Resource Partners, L.P. (NASDAQ:ARLP) projected that global coal demand will increase over the next 20-plus years on demand growth in Asia. The next slide, however, presented a more sobering view of U.S. demand, which it expects to remain stable.
One reason is that new government regulations are leading to plant closures. However, low natural gas prices are the other big issue since utilities generally switch to the lowest cost fuel option to keep costs down. This is why coal plant usage rates are off about 25% from their levels of just five years ago.
Alliance Resource Partners, L.P. (NASDAQ:ARLP) expects coal to stabilize at just under 40% of electricity production over the next decade or so. Of course that will fluctuate from year to year based on the price of each commodity. Alliance is a great coal miner, posting record production and sales last year, with plans to do the same again in 2013. And it regularly increases its dividend, recently on a quarterly basis. That’s impressive given the tough coal market. However, Alliance Resource Partners, L.P. (NASDAQ:ARLP) only does coal.
There are several coal companies, however, that have chosen a different path to the future. They have embraced natural gas.
CONSOL Energy Inc. (NYSE:CNX) is a major coal producer and has notable natural gas operations. While coal accounted for 80% of the company’s top line in 2012, natural gas is an increasingly important part of the company’s business. That exposure has been a major benefit through a difficult coal market.
CONSOL Energy Inc. (NYSE:CNX) was profitable in 2012, unlike many coal focused peers. In fact, it managed to increase its dividend slightly last year, which is a clear demonstration of the benefits of its dual focus. Even after that dividend hike, however, the recent yield is only around 1.4%. So this isn’t a good option for income investors.
Those looking for a safer way to invest in coal’s potential rebound, however, should like the prospects here. And, if that doesn’t pan out, the company should benefit from continued natural gas demand. Note that the shares haven’t sold off like others in the coal industry, so CONSOL Energy Inc. (NYSE:CNX) is more of a growth play than a turnaround play.
A Higher Yield Option
Natural Resource Partners LP (NYSE:NRP) has a similar model to CONSOL Energy Inc. (NYSE:CNX) in that it owns coal assets and, increasingly, other assets like natural gas and various other mineral assets. However, it doesn’t actually mine or drill for anything, it leases out its properties so others can do the dirty work. That removes much of the regulatory and operational risk from the equation and simplifies the partnership’s business model.