10/22/2012
By David Urani

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It hasn't been an easy couple of years for coal, and you can't blame them for being a depressed sector these days. It doesn't help much when the EPA makes you public enemy #1. Because of new regulation, as much as 12% of the nation's coal plants may have to be closed because of pollution restrictions. Not only that, but any newly built power plants are restricted at 1,000 lbs of carbon dioxide per megawatt hour; the average coal plant gives off 1,768 lbs which effectively means traditional coal plants are a thing of the past.

But check out the heat from Peabody Energy (BTU) which is seeing a strong bid after earnings.

They mentioned the big obvious points that led to the decline in EPS year over year, including lower than expected global GDP pressuring prices, along with a slowing China. And of course, there's been the natural gas boom here in America that's effectively made gas the cheaper option for power generation.

But there were some positives to be had in the quarter. Revenue was actually higher than last year, as coal generation is up 14% in Europe, despite the deep recession there, and in total coal imports worldwide hit a record.

And with respect to natural gas as a competitor to coal, prices bottomed out in April and have been on the rise. Below $3.00 it was clearly the cheaper option for power generators, but once it started creeping back towards $3.50 it was no longer attractive to switch coal plants for natural gas, and above $4.00 it should really be challenged. That being said, natural gas is likely to hit somewhat of a ceiling at that point as drilling would be expected to increase. Of course, both natgas and coal are benefiting from increased skepticism over nuclear power. 

Peabody management notes that they think coal demand has bottomed, and that it's set for a US rebound in 2013. Their EPS guidance for this year was issued at $1.88 to $2.08 versus the $1.88 consensus estimate.

David Urani
Wall Street Strategies