Top picks 2013: Peabody Energy

This leading coal miner is a favorite speculation in an out-of-favor sector.

By TheStockAdvisors Dec 31, 2012 2:20PM
Elevated view of freight cars with coal copyright Joseph Sohm-Visions of America, Photodisc, Getty ImagesBy Elliott Gue, Energy & Income Adviser

Our speculative favorite for 2013 is Peabody Energy (BTU), the world's largest private sector coal miner with operations focused on two regions of the world: the Powder River Basin (PRB) of the western U.S. and Australia.

President Obama's re-election catalyzed a knee-jerk sector-wide sell-off among U.S. coal mining stocks. But consider that back in 2008 Obama'a victory was expected to devastate the coal industry. Instead, Peabody Energy surged 62% during the first two years of his presidency.

A number of new regulations from the U.S. Environmental Protection Agency will impact coal plants during Obama's second term, including a Mercury and Air Toxics Standards (MATS) rule and a Carbon Pollution Standard.

The former will impact older coal-fired plants but many of those facilities are already slated for closure as they're uneconomic to run. The carbon standard would apply only to new coal-fired plants and few utilities have plans to build new plants at this time.

A more important driver of coal demand is the price of natural gas, as coal and gas are competitors when it comes to producing power.

When gas prices sank under $2/MMBTU in the spring of 2012, utilities burned more gas and less coal. But with gas prices recovering to over $3/MMBTU, we're already seeing clear signs of gas-to-coal switching.

Meanwhile, globally, coal will actually overtake oil to become the world's single-largest power source over the next five years, thanks to strong growth in demand from emerging markets including China and India.

And, don't forget the importance of metallurgical coal, the type used in blast furnaces to make steel. China accounts for almost half of global steel production and exerts a powerful influence on demand for met coal.

In 2012 a steadily worsening outlook for Chinese economic growth depressed demand for steel and eroded investor sentiment toward producers of met coal and iron ore. But China's economy has gained momentum recently.

Australia is a key exporter of both metallurgical and thermal coal to countries like India and China and Peabody is one of the largest and best-positioned miners in the country. Peabody Energy rates a buy under $33.

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Tags: BTU
1Comment
Dec 31, 2012 7:09PM
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Of course our cheap coal will continue to fuel China growth, while we are limitied in developing our own resources. Do not be surprised if the liberals legislate against all coal exports or better yet tax them in two years as an unclean energy for the world. Only problem is also the Chinese dominate the solar industry also. Look at all the government supported failures the US has.

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