I didn't think it could happen that fast. I just didn't believe our largely coal-based system for utilities is no longer largely coal-based. This year, natural gas will surpass coal as our principal form of utility fuel.
This change is having major implications for the stock market, especially because very few saw it coming.
Currently 33% of our power generation comes from coal and 33% from natural gas, with 20% coming from nuclear power, 6% from hydro and only 7% from renewables, chiefly wins at 4.7%.
As recently as two years ago, coal produced 39% of our power and it wasn't expected to reach parity with natural gas until 2020.
We've seen the havoc this decline has played out for the rails, which have seen radical double-digit declines in their principal cargo. It's crushed their earnings and required them to make massive cutbacks.
We have seen how it's destroyed the coal industry. Until just a few years ago, these stocks were riding high and we were talking about a coal supercycle.
We recognized that the average life of a coal company was 40 years and most of the plants were built at the time of President Carter, who called us the Saudi Arabia of coal and made coal plants a priority as a way to become energy independent. Those old plants are too worn out to retrofit or cost too much money.
But the one thing we haven't seen happen, until now, is the price of natural gas actually rallying above the $2 price it's been stuck at for a couple of years. Natural gas is hovering about $2.50 and that's a gigantic move for a commodity that we know we have more of than we can handle. I no longer say "glut" because no material moves up that much that is glutted. At first, many dismissed the rally because of a couple of spring heat waves and floods in Texas. But now that more seasonally cool weather has taken over and natural gas hasn't come down in price, it's a different story, deeply linked with the denouement of coal as a fuel in this country.
This move has created some tremendous opportunities, some of which have been exploited, namely the lowest-cost producers, Cabot Oil & Gas (COG) and Range (RRC), which have seen their stocks soar from the bottom, although they are still nowhere near their highs of a few years ago. They have the advantage of the cheapest natural gas out there, especially Cabot, which has production costs as low as $1 from its exceptional Marcellus shale in Pennsylvania.
A couple of stocks are totally back from the dead, namely Chesapeake (CHK) and Southwestern (SWN). Both have not-so-hot balance sheets, especially Chesapeake, so don't get too comfortable there. Encana (ECA), Devon (DVN) and Anadarko (APC) also have substantial reserves, but only Encana would give you the bang for the buck you might want. The super-majors, the Exxons (XOM) and BPs (BP), have a lot of natural gas, but it means little to their bottom lines.
The other winners? Some of the master limited partnership pipelines. The biggest beneficiary? The master limited partnership that is Energy Transfer Partners (ETP), which yields a mind-boggling 11%.
But wait a second. Before you reach for it, know that its parent, Energy Transfer Equity (ETE), was supposed to merger with Williams (WMB) to create the largest energy pipeline network, with a particular emphasis on natural gas. Now it wants to get out of the deal because it is too costly for the company. A Delaware court will decide the issue next week.
Old pal Kinder Morgan (KMI) would normally be a possibility, but I am still smarting from that huge slashing of the dividend.
One other opportunity could be Spectra Energy (SE), another pipeline company, which yields 4.8%, but it's already up almost 40% this year.
I think your best bet is to wait for the next oil price decline and bet that these natural gas companies will fall with the big oils. They shouldn't. And there's your chance.