The Truth About Trump’s Coal Campaign

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

Oil & Gas

During his campaign, Trump embraced the failing coal industry and vowed he would bring back coal. Signs like “Trump Digs Coal” were common at rallies in heavy coal-producing states.

But it’s clear that utilities, even with less stringent EPA regulations, won’t be building any new coal-fired plants in the U.S.

That’s important to investors for two reasons.

First, it should tell you to avoid any company whose fortunes link to coal. Second, it should give you a good idea of where to invest instead.

But before we get into that, let’s look at the state of the U.S. coal industry.

Since peaking in 2007, consumption of coal for power generation has declined by one-third here in the U.S. The 173 million tons mined in Q1 2016 was the lowest amount in a quarter since 1981.

It was a 17% decline from the total mined in Q4 2015. That was the biggest quarter-over-quarter decline in almost 32 years.

Part of the decline was due to above-normal temperatures last winter. But the Department of Energy indicated much larger forces were responsible.

Coal plant operators have had to comply with increasingly tight greenhouse gas emissions regulations. In addition, cheap natural gas and renewables continue to edge coal out of the power generation picture.

U.S. coal mines produce two types of coal: thermal and metallurgical. Power plants burn thermal coal to make electricity. Metallurgical coal is used by steelmakers and some cement plants to heat up kilns to make their products. Natural gas is replacing both thermal and metallurgical coal.

For utilities, steel plants and cement mills, the switch to natural gas is an easy one.

Crushers reduce coal to a fine powder before it blows into a kiln to burn. Coal plants usually require natural gas jets to start the fire anyway. So it’s a simple fix for plants to just install larger jets.

Another advantage is that most natural gas-fired plants burn the gas as they get it.

Plants that burn coal, on the other hand, have to keep an adequate supply on hand in case of supply disruptions. Miners, most of which belong to unions, periodically go on strike.

Pipelines that deliver natural gas work 24/7/365.

Lastly, natural gas has become cheaper than coal just about everywhere in the U.S. For instance, the average September spot price for Central Appalachian Coal was about $19 per megawatt-hour, and the price for natural gas at the Transco Zone 6 hub was about $11 per megawatt-hour.

Investors Take Note

There’s no question that the future of U.S. coal will be short-lived. In 2014, the top five U.S. coal producers – Peabody Energy Corporation (OTC: BTUUQ), Arch Coal Inc. (OTC: ACIIQ), Cloud Peak Energy Inc. (NYSE: CLD), Alpha Natural Resources (OTC: ANRZQ) and Murray Energy Corp. – mined a total of 554.1 million tons.

In 2015, every company produced less, and the total was 507.4 tons, a decrease of 8.4%. This year is on track to be even worse than 2015.

So with coal’s future in doubt, investors should avoid U.S. coal companies entirely.

But they aren’t the only ones whose business is lagging because of the cuts in coal production…

The Association of American Railroads noted that from the fourth quarter of 2015 to the first quarter of 2016, coal railcar loads dropped 20%. That’s a huge impact on rail companies like Norfolk Southern Corp. (NYSE: NSC) that are big coal haulers.

So what do I like instead? As longtime readers know, I’m a big fan of pipeline master limited partnerships.

Unlike coal, natural gas is delivered to its final destination via a national network of pipelines. And most of those are owned and operated by companies structured as MLPs.

The reason I like MLPs is most of them are very profitable. MLPs distribute almost all of their profits to unit holders (shareholders). That makes MLPs great for income-focused investors.

MLPS are safe, too. They make money on the volume of natural gas they ship, not the price of the gas itself.

And volumes are on the rise…

The U.S. is the world’s largest consumer of natural gas. The Energy Information Administration estimates annual consumption growth of 4.2 trillion cubic feet between 2012 and 2040.

Currently, the U.S. produces about 10 trillion cubic feet per year from shale gas. By 2040, that number is going to double. However, U.S. production will outstrip consumption as soon as 2018.

The balance will fuel U.S. liquefied natural gas exports. The U.S. is on track to become one of the top LNG exporters in the world.

All of this gas has to make it from the wellhead to its destination. And pipelines are responsible for moving it.

Every investor should position his or her portfolio with one or two MLPs that focus on natural gas transport. You’ll be glad you did.

Good investing,

Dave