Peabody Energy Corporation (BTU), BHP Billiton plc (ADR) (BBL): Coal Demand Won’t Plateau for Another 20 Years

The U.S. Energy Information Administration projects that energy use will grow “56% between 2010 and 2040,” largely because of emerging markets. It also expects coal demand to flatten, but not until the end of its projection period. In other words, for another twenty or thirty years, coal’s growth looks just as solid as any other fuel source.

That outlook doesn’t square well with coal’s image today. Granted that coal is dirtier than alternatives, particularly at older coal burning electric plants, but it’s still a vital source of power that isn’t going away. Coal stocks, however, are being priced as if they are doomed. That’s a buying opportunity for intrepid investors.

Already close to growth

Peabody Energy Corporation (NYSE:BTU) is a large U.S. coal company with operations in Australia. Those assets export coal to Asia and give the company a direct line into the markets that the EIA is projecting will see the fastest growth in coal demand. Peabody is probably one of the best positioned coal miners to meet that demand.

The company was profitable up until 2012, when it suffered a loss because of a one-time asset impairment charge. Low natural gas prices pushed coal prices lower, leading to the non-cash charge. However, Peabody Energy Corporation (NYSE:BTU) earned over $2.60 a share if you pull the charge out. And, the company didn’t cut its dividend despite the difficult year.

Peabody Energy Corporation (NYSE:BTU)Still, the coal market remains a difficult one right now. The company lost about a dime a share in the first quarter, but a focus on cost saving led to a second-quarter profit of over $0.30 a share. While that’s well below the year ago result of over $0.70 a share, it’s a move in the right direction. In fact, Peabody Energy Corporation (NYSE:BTU)’s CEO Gregory H. Boyce noted in the earnings release that “Both U.S. and global coal demand continue to grow, and we expect the seaborne market to exceed 1.2 billion tonnes this year as China and India set new import records.”

Even more diversification

Investors looking for even more diversification should consider BHP Billiton plc (ADR) (NYSE:BBL). The company is focused on iron ore, petroleum, copper, and coal. Although out of this quartet only petroleum is performing well, the collection allows BHP to shift its focus to the areas that have the best potential. And, this Australian company’s coal operations are situated close to Asian demand.

Coal made up about 15% of the company’s top line in the first half of fiscal 2012. While that makes this a much less direct coal play, the fossil fuel still plays an important role in the company’s performance. And as coal demand increases and coal prices pick up, investors should see that percentage rise. Meanwhile, BHP Billiton plc (ADR) (NYSE:BBL) is working on increasing efficiency across its entire portfolio to spur performance and maintain its low-cost edge.

Shareholders get the benefit of an around 3.9% yield while they wait for coal and other markets, like steel, to turn around. That should interest income investors seeking a broadly diversified mining play leveraged to Asia’s growth.

Back at home

An option closer to home is Cloud Peak Energy Inc. (NYSE:CLD). The company is the third-largest coal producer in the United States and focuses on the low-cost Powder River Basin region. Cloud Peak was spun-off from mining giant Rio Tinto plc (ADR) (NYSE:RIO) in 2009. Despite the industry’s difficulties, the company has remained profitable despite its top line trending lower.

Part of that strength comes from the desirability of its cheap coal in comparison to natural gas, which has seen its price rise dramatically year over year. That said, Cloud Peak Energy Inc. (NYSE:CLD) hasn’t been immune to the coal industry’s problems, as sales and earnings have been lower year over year in each of the last two quarters. In fact, in the first quarter, earnings fell over 40% year over year to $0.25 a share.

Like its brethren in the coal space, Cloud Peak Energy Inc. (NYSE:CLD) is a turnaround play. However, while largely a domestic supplier, it is pushing into the export market so it, too, can benefit from Asian demand. That should give the company an upside catalyst when demand and prices start to stabilize. The company has never paid a dividend, so income investors shouldn’t bother with it. But turnaround types should take a look.

Time heals all wounds

Coal is unloved right now, but that should start to change as demand and pricing pick up. Although 2013 is likely to be a transition year for the industry, it might be the best opportunity to pick up these companies at seriously discounted prices. Peabody Energy Corporation (NYSE:BTU) is an industry leading player with notable exposure to Asian demand. BHP Billiton plc (ADR) (NYSE:BBL) offers diversification on the product front, but a focus on the Asian region. Cloud Peak Energy Inc. (NYSE:CLD) is domestically focused, but has cheap coal and is increasingly looking abroad for sales. All three are worth a look for investors seeking coal exposure.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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