Coal Still Has King-Like Ways

Todd Shriber
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If an investor were to tune into certain shows on financial media networks at the right time, or wrong time depending on your perspective, the conclusion might be drawn that coal is dying a slow and painful death. Coal, perhaps even more so than crude oil, is the favorite whipping boy of the anti-fossil fuels establishment. It is allegedly dirty, expensive and even perilous to mine. Those are the battle cries of the anti-coal crowd, but the argument requires closer examination.

As is always the case when debate arises in the energy arena, one energy source is criticized by groups that have vested interests in a rival energy source. That is certainly the case with coal. Coal is attacked on multiple fronts. Not surprisingly, advocates of the green energy movement bash coal. That is to be expected as this crowd has a vociferous disdain for every fossil fuel. Yet from an investor's perspective, it pays to look at who is ripping coal with ulterior motives and that would be folks who are ardently bullish on natural gas.

Perhaps the epitome of this dubious argument is now barely a day old. Consol Energy (CNX), the fifth largest U.S. coal producer, said on Monday that it will pay $3.48 billion to acquire the oil and gas assets of Dominion Resources (D) in the Marcellus Shale, one of the most gas-rich regions of the U.S. At least one commentator called this a ''death knell'' for the coal business.

Applying that logic, does that mean we are led to believe that Exxon Mobil's $41 billion acquisition of natural gas producer XTO Energy (XTO) is a nail in the coffin of the oil industry? After all, Exxon (XOM) is the biggest oil company in the U.S. and its XTO purchase dwarfs Consol's buy.

Yet no one said oil is going by the wayside because of Exxon's XTO purchase. Plenty of oil majors are increasing their natural gas profile, but at the end of the day, oil isn't going anywhere. Neither is coal and investors would do well to believe in coal's fundamentals. Yes, natural gas is a fuel source worth investing in for the oil majors and the U.S. government would be wise to encourage further development of this fuel source if for no other reason than the creation of more jobs.

Coal is a jobs engine as well and there is something that the commentators that bash coal are reluctant to mention: Most of the big coal producing in the eastern U.S. are swing states when it comes to presidential politics and President Obama isn't going to let the coal industry evaporate on his watch. He wants to win another term and he knows states like Ohio, Pennsylvania and West Virginia hold the key.

That is actually a good segue into another point that the myopic view of coal detractors misses. It would be a critical error to view coal as a U.S.-specific investment thesis. Yes, the U.S. does get about half of its power from coal (another reason coal is not going to just vanish). So does Germany. India gets about two-thirds of its power from coal while Australia relies on coal for more than 75% of its energy. Of course we cannot forget about China. The world's largest country relies on coal for 81% of its power use.

Yet the coal bashers keep focusing on thermal coal demand, which is actually improving. That is the stuff used by U.S. electric utilities. The focus should be on metallurgical coal, a key ingredient in the steel-making process. U.S.-based coal producers realize this and while they were getting slammed in late January and early February, they were also telling investors that they would be ramping up metallurgical coal shipments to China this year. Patriot Coal (PCX) joined that chorus today by saying it would ship 1.5 million tons of metallurgical coal to the Pacific Rim this year with the possibility of that number increasing.

The detractors may also forget to mention that China completes 10 new coal-fired plants every month and that coal prices are up 35% in the past month. Natural gas bulls would pass out with glee if the prices for their respective commodity rose 5% in a month. And the coal bears would never tell you that in the past year, the Market Vectors Coal ETF (KOL) is up nearly 190% while the First Trust ISE-Revere Natural Gas ETF (FCG) is up 90% and the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index (IEO) is up just over 50%.

The bottom line is coal detractors can hem and haw all they want, but coal is not going away anytime soon. China will see to that.