(Story updated to add that Enbridge confirmed its planned expansion of two major oil pipelines from Canada to the Gulf Coast.)
) -- There's a shift in U.S. power-production resources from coal to natural gas. But don't write King Coal's obituary just yet.
And, on the other side of the equation, stronger demand for natural gas has created new investment opportunities, as seen by the jump in exploration-and-production stocks. But some of the best returns may eventually come from transportation and storage.
Coal shares have slipped across the board in recent days in the wake of a report that U.S. power plants are consuming about 22% less coal than last year, hurt by a warmer winter. And then on Tuesday, the Environmental Protection Agency proposed its first-ever standards to cut carbon dioxide emissions from new power plants, which is a blow for coal and a plus for plants fired by natural gas as they have low emissions.
Industry bellwether and the world's biggest coal producer,
, fell to a 52-week low this week and is down 58% over the past 12 months. Others in the industry have been hit hard as well.
is up 12.4% so far in 2012.
It looks bad for coal, but bailing out of industry stocks now might be a mistake, first, because many coal companies have guaranteed contracts that will get them through the current year without a major blow to earnings, and second, many of the biggest coal companies are multinationals, with mines and customers worldwide and the demand for coal outside the U.S., particularly from China, is booming.
Peabody's CEO said at an industry conference on Monday that "coal has been the fastest-growing major global fuel and is expected to become the world's largest energy source. The seaborne coal market has exceeded 1 billion tons for the first time, and the cost of coal is just a fraction of global oil and liquefied natural gas."
And he said that, as an example of that demand, in the last four months of 2011, China's coal imports rose 40% from the year before, while India's thermal coal imports rose 35% for all of 2011, and it is taking steps to eliminate its coal import tariff.
As for the EPA's proposals, they are seen mostly impacting new coal-fired power plants, although existing ones will have to retrofit their facilities to meet the new standards or convert them to burn natural gas instead of coal, which is an expensive undertaking.
But Sterne Agee analyst Michael Dudas said in a research note Wednesday that the EPA's rules will have "minimal impact on coal-fired generation in the foreseeable future."
He says coal stocks, which have been hurt by the big inventories on hand and the need for miners to cut back production, may now be undervalued. He has "buy" ratings on several, including Peabody and
Alpha Natural Resources
. "We continue to believe coal equities are reflecting a much more onerous pricing and volume environment than we anticipate during 2012-2014," Dudas wrote.
The shift to natural gas and the proposed EPA standards are also having an impact on elecricity generators. Those that are relatively immune include
, which is the nation's biggest nuclear plant operator, and
, which has diverse sources of energy generation, ranging from solar to nuclear.
On the other side of the energy equation, natural gas is so plentiful that some exploration-and-production firms are slowing output or putting caps on wells until prices improve.
Transportation and storage of oil and gas is one of the pricier parts of the equation, and those facilities take a long time to build. And the Interstate Natural Gas Association of America said in a study last year that the U.S. and Canada will need an annual average midstream investment of $10 billion per year over the next 25 years to accommodate growing oil and natural gas infrastructure needs.
So companies that perform those services now should benefit from the shift to gas by U.S. utilities. And there are two companies, both Canada-based, that are positioned for that:
, as they already have a network of pipeline and storage facilities throughout North America.
impacted by the shift from coal to natural gas listed in inverse order of "buy" ratings:
Enbridge, with a market value of $30 billion, operates a network of oil and natural gas pipelines and storage facilities throughout Canada and the U.S. and is the owner of one of North America's largest crude-oil pipeline networks.
Its shares are up 5.3% this year and have a three-year, average annual return of 42%. Analysts give its shares one "buy" rating, one "buy/hold," one "hold," and one "weak hold," according to a survey of analysts by S&P. Enbridge officials on Monday confirmed the company's expansion plans for two U.S. pipelines that will transport crude oil from Canada to refineries along the U.S. Gulf Coast. It will cost about $3.8 billion for the lines, one, an upgrade of a line running from Flanagan, Ill. (southeast of Chicago), to Cushing, Okla., while the other, a joint venture, will run parallel to its existing Seaway Pipeline from Cushing to the Gulf Coast.
Morningstar analysts say that "Enbridge's assets produce steady cash flows with little sensitivity to volumes or commodity prices, and their regulated rates virtually ensure profitability."
TransCanada, with a market value of $30 billion, is among the largest pipeline operators in North America. It owns more than 37,000 miles of natural gas pipelines, most of which transport gas from Alberta to the U.S. and within Canada. It also has power generation projects and can store natural gas.
Its shares are up 0.16% this year and have a three-year, average annual return of 25%. Analysts give its shares two "buy/hold," ratings and two "holds," according to a survey of analysts by S&P.
This company was behind the proposed Keystone XL pipeline project turned down by the Obama White House, but the company could reapply and find more favorable treatment from a new administration. It is now pursuing approval for the construction of another leg of the pipeline, from Oklahoma to the Gulf, and that does not require a presidential permit so, coupled with access to an export terminal, it could prove a bonanza for natural gas exports from the U.S.
Exelon, with a market value of $26 billion, is the largest nuclear plant operator in the U.S. with 11 facilities and it supplies wholesale energy across seven states for both regulated and unregulated utilities. Its nuclear status keeps it relatively immune from fluctuations in commodities prices.
Its shares are down 9% this year and have a three-year, average annual loss of 0.3%, but over 15-years its average annual return is 12.5%. Analysts give its shares four "buy" ratings, three "buy/holds," and 12 "holds," according to a survey of analysts by S&P.
S&P has it rated "buy," and says: "We think the stock has been oversold" and, given its dividend yield, "is attractive for its total return potential." Goldman Sachs, which has it rated "neutral," aid in a March 28 research note, that due to Exelon's "large merchant nuclear generation fleet, (it) remains a beneficiary of environmental rules driving coal plant retirements and retrofits, along with tighter long-term power market conditions, but near-term headwinds of low natural gas/power prices remain."
NextEra, with a market value of $25 billion, distributes power to 4.5 million customers in Florida. Its sources include natural gas, wind and solar and nuclear Its merchant segment generates and sells power throughout the U.S.
Its shares are down 1.3% this year and have a three-year, average annual return of 13%. Analysts give its shares six "buy" ratings, six "buy/holds," 10 "holds," and one "weak hold," according to a survey of analysts by S&P.
URS, with a market value of $3 billion, is an engineering and construction company that does major projects worldwide, including for the U.S. government.
Its shares are up 23% this year and have a three-year, average annual return of 1.9%. Analysts give its shares seven "buy" ratings, three "buy/holds," seven "holds," and one "weak hold," according to a survey of analysts by S&P.
This company will likely be tapped to retrofit existing coal-fired power plants to use natural gas, or build new gas-powered plants or storage facilities. Sterne Agee has it rated "buy," with a $56 price target, a 32% premium to the current price. It says "we see increased indications from major utilities that new natural gas facilities should be the generation of choice over the next several years."
Alpha Natural Resources
Alpha, with a market value of $3 billion, is a producer of thermal and metallurgical coal. It has made two major acquisitions in the past three years.
Its shares are down 27% this year and have a three-year, average annual loss of 9%. Analysts give its shares nine "buy" ratings, four "buy/holds," and 11 "holds," according to a survey of analysts by S&P, which itself has it rated "hold."
In a March 13 commentary, S&P said that at current share prices, "we think much of this bad news is already discounted in the stock price." Sterne Agee has a $35 price target on its shares, a 138% premium.
Peabody, with a market value of $8 billion, is the world's biggest privately held coal company, supplying more than 10% of U.S. electricity generation and 2% worldwide.
Its shares are down 13% this year and 58% over the past 12 months. Analysts give its shares 10 "buy" ratings, nine "buy/holds," four "holds," and one "weak hold," according to a survey of analysts by S&P.
S&P, which has the shares rated "hold," likes the long-term prospects as it says its sheer size is a competitive advantage, including its operations worldwide, which give it "direct exposure to international coal demand as an avenue of growth not afforded to its competitors." Sterne Agee has a $60 price target on its shares, a 109% premium.
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