Another Nail in the Coffin for Coal

 | Jun 02, 2014 | 10:00 AM EDT
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President Obama's latest call for cleaner energy, and a further commitment to helping on climate change, got a big boost today as he called for all remaining fossil-fuel-burning power plants to decrease carbon emissions by 30% by 2030. It is the first time carbon dioxide will be comprehensively regulated.

President Obama is clearly fulfilling his State of the Union promise of taking on the climate change challenges unilaterally, convinced of the dysfunction of Congress. Indeed, Senate Minority Leader Mitch McConnell (R-Ky.) immediately vowed to try to block the Environmental Protection Agency measure, challenging the reach of the Clean Air Act to implement these new regulations. The CEO of the National Mining Association, Hal Quinn, was on the Sunday shows yesterday claiming the measure would lead to a loss of jobs, as well as more expensive and less reliable electricity for everyone.

Since 75% of all emissions from power plants are still attributable to coal, there can be little doubt about it: This is an anti-coal measure that's designed to put another nail in the coffin of coal production.

Even though the proposal looks to limit carbon emissions 15 years into the future, the trend for coal-fired plants in this country, still 40% of production, gets grimmer all the time. It has been a death spiral for coal stocks over the last two years as other energy sectors have enjoyed fantastic gains. Dedicated coal producers such as Arch Coal (ACI) and Alpha Natural Resources (ANR) have gotten pummeled and the "war on coal" has hurt even those that have had a measure of their production tied to natural gas, such as Peabody Energy (BTU).

For those hoping that exports might save the U.S. coal production industry, there's more bad news. In China, the largest export market for U.S. coal, there has been a growing clamor against emissions in the major Eastern cities. This was no doubt part of the rationale for the massive Gazprom $400 billion dollar, 30-year natural gas deal that was inked just days ago. That contract, which will eventually bring 60 billion cubic meters of gas to Eastern China a year, will crush the use of coal-fired power plants in these cities, making the air cleaner and also hurting a central U.S. export market for domestically mined coal.

For more on the EPA proposal's likely effects on the coal industry, please see Glenn Williams' story here.

Again, these changes are a long way into the future, but U.S. utilities must begin preparing for it now -- and fellow Real Money contributor Glenn Williams will be writing a piece that you must read on winners and losers in the utility space.

For me, the opportunity is two-fold. First, it is another item in the long laundry list of reasons that the tide is running against coal producers long-term. It's hard to sell Arch at $3.50 or Peabody at $15, but I continue to dislike these names.

The other opportunity remains where my long-term excitement continues to percolate: in natural gas. With more long-term conversions in power plants implied by this bill, there is now another reason to get into judiciously run natural gas producers for the long haul. Add to the picture the ever-closer reality of liquefied natural gas exports; sequestration and long-term bullish storage numbers; the increase of pipeline infrastructure; and the horror of crude by rail, and you've got a ton of reasons to look at natural gas at $4.40 per million cubic feet as a gift.

Same thesis, same names: Southwestern (SWN), Ultra Petroleum (UPL) and Devon (DVN).

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