NEW YORK (TheStreet) -- Despite signs to the contrary, there is a bullish outlook for coal over the long term. Recent reports from BP (BP), Caterpillar (CAT) and ExxonMobil (XOM) were positive. Even though there may be a "War on Coal" from the Obama Administration, the approval of the Keystone Pipeline should also be a boost eventually for securities such as Peabody Energy (BTU), the biggest coal company, and Market Vectors Coal (KOL), the exchange traded fund for the sector.
There is certainly no doubt that coal has a long way to rebound. Market Vectors Coal, now around $17.60 a share, is down from about $60 a share in June 2008. Peabody Energy was close to $90 a share at that time. Now it is around $16.50. The same story persists for other publicly traded companies in the coal industry.During 2008 and into 2009, manufacturing activity from big consumers like China, Europe, and Russia, among others, fell off.
Natural gas declined in price, which made it more attractive as an energy source to utilities. The "War on Coal" has made it more difficult for coal producers as it favors fuel sources that are more environmentally friendly.
According to the World Coal Association, a collective of major industrial coal producers and stakeholders, more than 40% of the world's electricity and about 30% of the primary energy needs come from coal.
Recent reports from BP and ExxonMobil predict that the use of coal also will increase in the decades ahead. The "BP Global Energy Outlook 2035" has the consumption of coal growing by 1.1% annually. ExxonMobil's "The Outlook for Energy: A View to 2040," sees the world's demand for coal rising until 2025.
In a recent earnings call, Doug Oberhelman, chairman and CEO of Caterpillar, the biggest heavy equipment maker on earth, remarked, "The good news is, mine production has generally been up and improved in 2013. And we think it will likely be up again in 2014."
There are three ways for investors to profit from the recovery in the coal sector over the long term.
Market Vectors Coal has a lot going for it as a play on coal. It holds a wide range of assets. That protects shareholders from a single company collapsing, which is a distinct possibility in the coal industry. As shown by its high in June 2008, it has tremendous upside. Individual producers may go bankrupt, but the entire coal industry is not going out of business.
As for stocks in the coal sector, there was a very positive article on Peabody Energy in Barron's last August. In November, Goldman Sachs issued a bullish report on Peabody Energy with a target price of $26 a share by May 2014. The article in Barron's concluded that, "In sum, with low-cost domestic and international operations, Peabody could energize the portfolios of patient investors."
That is the best way to look at Peabody Energy. Rather than rising by 30% as predicted by Goldman Sachs when it was trading around $20 a share in early November last year, Peabody has fallen almost 25%.
The third way to gain from the rebound in coal is buying shares of companies that will benefit from increased activity in coal, but have other lines of business to compensate for weakness in the sector. Caterpillar is an obvious choice. Another is BHP Billiton (BHP), the world's largest natural resources company.
Both have above average dividend yields. (Caterpillar at 2.60%, BHP Billiton at 3.76%.) Shareholders are not stuck holding a "dead money" investment while patiently waiting for the coal business to recover.
China is starting to grow again with record import and export activities for 2014 as reported by its Custom Administration. That should increase the demand from both the world's largest consumer of coal and the world's biggest trading partner. If the Keystone Pipeline does start to export natural gas from North America, the price should rise due to greater demand. That will also make coal more attractive again to utilities and others.
The coal industry is not going out of business. Over the long term, investors can mine some major profits.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.