NEW YORK (TheStreet) -- The Environmental Protection Agency is coming down hard on the coal-based power plants, and this creates some exciting new investment opportunities.
Earlier this month, the EPA released its highly anticipated proposal that aims to cut carbon emissions by 25% by 2020 and 30% by 2030 from 2005 levels. So far, since 2005, the U.S. emissions have already fallen by 15%. The additional decline will be achieved by placing carbon emission limits on coal-based power plants.
As a result, the coal related stocks, including miners and energy producers such as Peabody Energy (BTU), Alliance Resource Partners (ARLP), Yanzhou Coal Mining (YZC), Walter Energy (WLT) and Arch Coal (ACI), could be in for a challenging future. This can further aggravate the performance of Market Vectors Coal ETF (KOL). The coal sector fund is down 4% for the year to date, currently at $18.60.
On the other hand, America's Natural Gas Alliance, or ANGA, has painted a rosy outlook for the natural gas industry as the government tries to reduce carbon emissions.
That being said, not all coal stocks might behave in the same way. Unlike most of its peers in the industry, Consol Energy (CNX) is one coal stock that might continue to outperform the market. That is because Consol, one of the oldest players in the American coal industry, is already transitioning towards natural gas. The company has been reducing its exposure towards coal by selling its mines and at the same time, it is eyeing an uptake in shale gas production from Marcellus and Utica Shales.
All of the coal companies mentioned above, including Consol Energy, as well as more than two dozen other big players in the coal industry, including the world's biggest coal miner China Shenhua Energy, Australia's coal transportation company Aurizon Holdings and coal mining equipment maker Joy Global (JOY), are represented in the Market Vectors Coal ETF.
Market Vectors Coal ETF has significant exposure towards the energy sector. The fund has allocated nearly 62% of its net assets towards coal-based energy companies.
The fund's performance has been disappointing, to say the least. Last year, the ETF dropped by more than 20% as the global coal industry struggled amid a weak pricing environment. The global coal industry has been struggling due to the oversupply and soft demand from emerging markets.
Moreover, coal's future doesn't look any brighter which will continue to weigh on the performance of the Coal ETF. China, which has driven the demand for coal, is shifting towards natural gas. This was evident from the massive 30-year, $400 billion gas deal between China and Russia. No wonder Dean Dalla Valle, BHP Billiton's (BHP) president of coal said that the commodity's prices will remain weak, at least in the short term.
Under this kind of tough business environment, the EPA's carbon-emission plans will add salt to the Market Vector Coal ETF's wound.
On a positive note, a reduction in the consumption of coal could lead towards an increase in demand for natural gas as power generation companies turn towards the greener alternative. According to EPA's estimates for power generation, natural gas produces half as much carbon emission as coal.
This could cause an increase in demand for natural gas in the U.S. by 3 billion cubic feet per day to 10 billion cubic feet per day by the end of the decade, according to ANGA. This bodes well for oil and gas producers, particularly those that get a significant portion of their output as gas such as Chesapeake Energy (CHK), Southwestern Energy (SWN) and Cabot Oil & Gas (COG).
Chesapeake, in particular, could be an interesting stock as it is the nation's second largest gas producer with significant operations in four unconventional gas plays: Barnett Shale, Bossier Shale, Haynesville Shale and the prolific Marcellus Shale. The company has been eyeing a turnaround by cutting costs and selling or spinning off assets as it tries to reduce its debt levels.
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.
TheStreet Ratings team rates CHESAPEAKE ENERGY CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate CHESAPEAKE ENERGY CORP (CHK) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth, compelling growth in net income, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 3.2%. Since the same quarter one year prior, revenues rose by 47.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- CHESAPEAKE ENERGY CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, CHESAPEAKE ENERGY CORP turned its bottom line around by earning $0.68 versus -$1.62 in the prior year. This year, the market expects an improvement in earnings ($2.02 versus $0.68).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 632.8% when compared to the same quarter one year prior, rising from $58.00 million to $425.00 million.
- Net operating cash flow has increased to $1,291.00 million or 39.71% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 17.51%.
- Powered by its strong earnings growth of 2600.00% and other important driving factors, this stock has surged by 47.69% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: CHK Ratings Report