The U.S. coal industry is on a slow and painful path towards elimination, no matter which policies President Trump imposes today or tomorrow. There's no such thing as "clean coal". The industry faces not only mounting environmental burdens but also fierce competition from natural gas and renewables that will make their way into coal country as new pipelines come online to bring gas from the Utica and Marcellus shale regions to the northeast, and to export U.S. liquefied natural gas (LNG).
According to the Energy Information Administration (EIA), total U.S. coal consumption by domestic power sector has fallen to 766 million tons in 2018, from 1,172 million tons 10 years ago, a 34% decrease. Beyond 2020 that number could fall below 50% as power generators switch to burning natural gas and renewables like solar increase their footprint.
To worsen the outlook for coal, the Environmental Protection Agency (EPA) has clearly stated that the Affordable Clean Energy rule would increase carbon emissions and lead up to 1,400 premature deaths annually by 2030, due to increased rates of microscopic airborne particulates, known as PM 2.5, which are dangerous because of their link to heart and lung disease as well as their ability to trigger chronic problems like asthma and bronchitis.
At this juncture we can only take a bearish view on coal stocks and offset this short with long positions in natural gas. We will be short sellers of Peabody Energy (BTU) , Arch Coal (ACH) , Consol Energy (CEIX) and Cloud Peak Energy (CLD) , and take long positions in Range Resources (RRC) , Cabot Oil & Gas (COG) and The Williams Cos. (WMB) .
Why Are Utilities Burning Less Coal?
The life of thermal coal prices in the U.S. depends on profitability of burning natural gas vs. coal. Natural gas is cheaper, cleaner, more reliable and less volatile than coal. Natural gas emits nearly 60% less CO2 per kWh than coal in power generation. Thus, no matter what breaks the Trump Administration gives to the coal industry, the numbers do not lie.
According to The Williams Cos., one of the largest natural gas midstream companies, carbon intensity of the U.S. power sector has fallen by 24% since 2005 as natural gas supplanted other fossil fuels in power generation. In addition, natural gas producers and consumers are allocating a portion of their capital to the increase in renewables.
Williams says that on a energy content basis, coal trades at $2.42 per million British Thermal Units (MMBTU), slightly below the $2.75/MMBTU for natural gas. Williams also noted that 51% of the total power plant retirements through 2022 are from coal fired generation units, while 61% of the announced power capacity additions are from gas fired units.
Coincidentally, to coal sector misfortunes, the U.S. northeast, home of major coal producing states like West Virginia, is also one of the largest producers of natural gas, thanks to prolific reservoirs located in the Utica Shale and Marcellus Shale (located in Ohio, West Virginia, Pennsylvania and New York states).
To add more competition to the coal industry, deep pocketed major oil companies like BP (BP) , are entering the renewables space. Lightsource, BP's renewable arm, just entered the electricity generation market in the northeast this month with the acquisition of six solar development assets from Orion Renewable Energy Group. BP's 135MW portfolio consists of projects in the liquid PJM power pool, and specifically in the rapidly growing energy markets of Pennsylvania and Maryland, not far from the coal producing sector. In short, this is a death warning to coal burners that gas and solar are soon to overtake.
The Trump Administration can throw as many life lines to the coal industry as regulations permit but it cannot force utilities to burn more coal when the power sector is at an inflection point.
(BP is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells BP? Learn more now.)