Peabody Energy Corporation (BTU), Cloud Peak Energy Inc. (CLD), CONSOL Energy Inc. (CNX): Two Coal Stocks to Buy, One to Sell

CONSOL Energy Inc. (NYSE:CNX)

CONSOL Energy Inc. (NYSE:CNX) Energy has a revenue base pretty similar to Peabody’s. Therefore, the company remains prone to sluggish coal demand in the international market as well as poor met coal demand. In the US, the company derives most of its supplies from the Appalachian Basin, which has one of the finest coals in the world. However, fine quality means that it is expensive and unable to compete with natural gas (unlike coal from PRB, which is cheap and of low quality)

That said, CONSOL Energy Inc. (NYSE:CNX) is well positioned to survive the challenges of the Appalachian region as the low cost producer with Atlantic Basin export opportunities. Moreover, the company has a compelling sum of the parts valuation and option value within its gas acreage position.

The upside case of $50 assumes a 6.5x forward multiple applied to a projected 2015 coal segment EBITDA of $1.5 billion. This higher EBITDA value results from assuming a 2015 met coal price of $200/tonne vs. our base case of $180/tonne.

The downside case of $30 assumes a 4.5x forward multiple applied to a projected 2015 coal segment EBITDA of $1.3 billion. This lower EBITDA value results from assuming a 2015 met coal price of $160/tonne.

Foolish Bottom Line

The rebound in natural gas prices is definitely an emerging theme that money managers are keenly looking into. However, no one is sure for how long this rise in gas prices will remain there. These prices are dependent on lots of factors like gas drilling/supplies, government approval to export LNG, discovery of more shale regions, weather (gas demand rises in cool weather) and so on. On the other hand, coal players with strong exposure to met coal and international thermal coal market seems a more reliable theme to invest. Therefore, I will suggest investors take a long position in CONSOL Energy Inc. (NYSE:CNX) and Peabody Energy Corporation (NYSE:BTU) and a short position in Cloud Energy when making a long-term investment.

The article 2 Coal Stocks to Buy, 1 to Sell originally appeared on Fool.com and is written by Zain Abbas.

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