How to Profit From Coal’s Big Phaseout

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

Last year, utilities closed 94 coal-fired plants, bringing the total number of closed coal plants to more than 200.

This year, another 41 are biting the dust.

That’s more than 18.9 gigawatts of coal-fired power generation gone.

The media and coal advocates say these plants were closed due to the Clean Power Plan and strict environmental regulations…

But the real reason coal is on its way out is twofold:

  1. Aging coal plants can no longer function efficiently.
  2. There’s a cheaper alternative – natural gas.

More than 91% of U.S. coal plants were built by utilities in the 1980s or earlier.

That means about 697 of the 765 utility-owned coal plants are more than 35 years old.  

Americas_Coal_Plants_Antiquated

Nothing lasts forever, and that applies especially to coal-fired power plants. The average age of plants retired last year was 58 years old.

The rest will disappear faster than most “experts” think they will. In fact, there are six states – Vermont, Maine, Hawaii, Rhode Island, Idaho and California – that no longer have ANY utility-owned coal-fired plants.

Connecticut, South Dakota and Delaware each have only one coal plant left.

By 2025, Oregon, Massachusetts and Washington won’t have any.

I’m sure it won’t shock you to learn that the first states to rid their electric grids of coal have been predominantly liberal. But there are plenty of conservative-leaning states getting rid of them, too. Tennessee has one on the closure list, Kentucky has four, and Alabama has eight.

All are scheduled to close by 2019 or earlier.

Also leading to coal’s demise, as I noted earlier, is cheap natural gas.

In 2015, natural gas-fired power generation grew by 19%. Most of that was due to utilities’ need to replace retired baseload coal-fired plants.

Natural gas-fired plants are cheaper and quicker to build than their dirty cousins. Between 2016 and 2018, 18.7 gigawatts of them will be firing up. This will nearly offset the 18.9-gigawatt deficit left by the closing of the coal plants.

The closures of coal plants and rise of natural gas use are clearly affecting demand for thermal coal. Ohio, Indiana and Pennsylvania are all big thermal coal producers. Between 2007 and the end of last year, they saw demand drop 49%, 37% and 44%, respectively.

Back in April, the largest publicly held coal company, Peabody Energy Corp., filed for bankruptcy. It blamed its woes on overproduction of U.S. shale gas and tough emissions rules.

A few months before Peabody threw in the towel, No. 2 producer Arch Coal did the same thing. Patriot Coal, Alpha Natural Resources and Walter Energy are all in the same boat.

This year, according to the EIA, coal production will drop 12%. If that holds true, it will be the biggest annual drop since 1958.

(On a side note, filing for Chapter 11 bankruptcy will excuse many of these companies from having to clean up their abandoned mines. Sadly, that will leave U.S. taxpayers with the bill. Peabody Energy alone has an estimated $900 million in unfunded cleanup liabilities. And that’s just in Wyoming.)

Needless to say, I would steer clear of the coal sector. Instead, investors should turn their attention to the many great opportunities in the booming natural gas arena.

One of my favorites is an exploration and production company. My paid readers know I’ve been following it for years.

Gulfport Energy Corporation (Nasdaq: GPOR) is the largest natural gas-focused E&P company in the Utica Shale. It has 243,000 acres there.

Gulfport got into the Utica Shale long before most other operators. So it was able to purchase acreage at a fraction of what other producers paid.

But one of the reasons it’s doing so well is its hedging program. Gulfport has 82% of its estimated 2016 natural gas production hedged.

And the price it’s hedged at is $3.20 per million British thermal units, well above last Friday’s spot price of $2.797. That goes right to the bottom line.

As a result, analysts have raised Gulfport’s 2016 earnings estimates from $0.63 per share to $0.67 per share. Gulfport had a $358 million secondary offering this past March that strengthened its balance sheet.

Gulfport’s earnings and its share price would likely be higher except for one big problem. It needs additional pipeline and processing infrastructure in the Utica to handle its increasing production volumes of natural gas, natural gas liquids and crude oil.

Much of that infrastructure is under construction. Perhaps that’s why one group of investors has placed long-term bets on Gulfport: energy-oriented hedge funds.

Even though coal is on the way out, natural gas is certainly well on its way to replacing that dirty fuel. And Gulfport Energy is a great natural gas play.

Good investing,

Dave