Wednesday January 02, 2013
by Elliott Gue, editor Energy & Income Adviser
Our speculative favorite for 2013 is Peabody Energy (BTU), the world’s largest private-sector coal-mining firm with operations focused on two regions of the world: the Powder River Basin (PRB) of the western US and Australia.
President Obama’s re-election catalyzed a knee-jerk sector-wide sell-off among US coal mining stocks. But consider that back in 2008 Obama'a victory was expected to devastate the coal industry. Instead, Peabody Energy surged 62 percent during the first two years of his presidency.
A number of new regulations from the EPA will impact coal plants during Obama’s second term including a Mercury and Air Toxics Standards (MATS) rule and a Carbon Pollution Standard.
The former will impact older coal-fired plants but many of those facilities are already slated for closure as they’re uneconomic to run. The carbon standard would apply only to new coal-fired plants and few utilities have plans to build new plants at this time.
A more important driver of coal demand is the price of natural gas as coal and gas are competitors when it comes to producing power.
When gas prices sank under $2/MMBTU in the spring of 2012 utilities burned more gas and less coal. But with gas prices recovering to over $3/MMBTU, we’re already seeing clear signs of gas-to-coal switching.
Meanwhile, globally, coal will actually overtake oil to become the world’s single-largest power source over the next five years thanks to strong growth in demand from emerging markets including China and India.
And, don’t forget the importance of metallurgical coal, the type used in blast furnaces to make steel. China accounts for almost half of global steel production and exerts a powerful influence on demand for met coal.
In 2012 a steadily worsening outlook for Chinese economic growth depressed demand for steel and eroded investor sentiment toward producers of met coal and iron ore. But China’s economy has gained momentum heading into 2013.
Australia is a key exporter of both metallurgical and thermal coal to countries like India and China and Peabody is one of the largest and best-positioned miners in the country. Peabody Energy rates a buy under $33.
Learn more about this financial newsletter at Elliott Gue's Energy & Income Adviser.