(By Rich Bieglmeier) Could coal be ready to make a comeback? November 6th could be a new birthday or death certificate for the sector. At least in terms of stock performance, President Obama has sort of made good on his promise to bankrupt new coal plants, instead the regulation web has caught new and old without discrimination. Record low natural gas prices haven't helped the industry much either.
EPA rules and gas prices have made it too costly for many older, coal-fired power plants to cover the cost of operations. As a result, in the last two years, more than 100 coal plants have been retired or soon will. For the first time since records have been kept, coal's percentage of the electricity generation market will fall below 40%. You'll see the impact on your electricity bill soon, despite record low natural gas prices. How does that work?
It works that way because energy producers need to bid higher to cover the costs of crossing over to natural gas and to meet carbon dioxide emission standards. Economics 101 – there are no free lunches, somebody has to pay for it, and that's you.
So where will the demand for coal come from you ask?
While the US's demand for its most abundant resource is falling, world demand is rising. According to the latest BP Statistical Review, "world coal consumption grew 5.4 percent in 2011 and world coal production grew by 6.1 percent. The decline in U.S. coal consumption was offset by a large increase in Asia's coal consumption, which accounted for all the net growth in 2011. China's coal consumption grew 9.7 percent between 2010 and 2011, and India's coal consumption increased 9.2 percent. China consumed 49 percent of the world's coal supply in 2011."
The increase in global demand has led to record exports in 2011 as the United States has high grade coal used to make steel that is in demand in China, India and Brazil. With the global economic slowdown, reports of unused coal piling up, along with the combo of regulation and gas prices have crushed coal stocks.
So you might be wondering, why is iStock writing about coal, shouldn't it be an obituary?
Our interest comes from
Patriot Coal Corporation (
PCX) holding one of the top positions in our weekly accumulation scorecard. Last week, investors gobbled up 1.73% of PCX's much reduced market cap. Today, the stock is up 31% on more than double the average daily volume, already.
Unless the company goes out of business, valuation wise the company is essentially being given away at a going out of business price. The stock trades for 5 cents for every dollar Patriot does in revenue per share. Its book value is $5.87 and the stock trades for less than $2, and its enterprise value (hypothetical takeover price) is $42.60. We don't think anybody is going to pay that, but PCX has been as high as $ 24.99 in the past 52-weeks and spent most of the past 12 months above $6.
With 28% of Patriot Coal Corporation's (PCX) float (shares available for trading) sold short, a squeeze that takes PCX's price to $2.50 is reasonable. That's a heck of a return from here.
Besides, how long can it be before a Chinese company makes a play for Patriot Coal?