The best days are gone

In February, I talked about the disruption we needed to expect when oil drillers came back on line in the U.S. — companies were more likely to buy technology that could replace workers and make production and exploration more efficient and cheaper in the long run.

Today, I want to get you ahead of the curve on the coal industry.

When Donald Trump campaigned, he talked about bringing back coal and restoring it as major fuel source. There’s no doubt that coal is still a crucial energy source in the U.S., but in recent years its luster has begun to fade as natural gas has become a cheap alternative.

In 2007, coal was responsible for 50 percent of the mix for electricity production. Last year, that number was 30 percent.

And this isn’t a regulatory issue at its heart. This is simply the fact that the abundance of U.S. natural gas from shale fields has made natural gas cheaper to use. And, natural gas burns more efficiently, so its ultimately cheaper than coal, even if coal is cheaper by volume.

Even if President Trump rolls back every EPA rule about clean energy, it won’t change the economics of energy production — natural gas is the long-term bet industry has made.

What’s more, if coal makes a comeback, it’s not going to be the higher-cost, aging mines in Appalachia that will see the rebound, it will be the big strip mining operations in the Midwest and West. They are more productive and less labor intensive. Again, it’s the same theme… more machines and fewer people.

So don’t buy into the coal story that is about to be one of the hot topics for talking heads on financial channels. The world’s largest coal company, Peabody Energy, comes out of bankruptcy in April. This will certainly spur stories about the renaissance in U.S. coal.

Yes, coal demand may increase, but not to the levels it was say, five or 10 years ago. And it’s not going to mean a flood of jobs, either. Keep your investing dollars away because the best days are gone for coal as an energy source.

The two coals

Did you know there are two types of coal? There’s coking coal and thermal coal.

Coking coal is used in making steel. Thermal coal is what’s burned for energy production. When China was racking up double digit GDP numbers year after year, it was buying coal like it was going out of style.

The building boom and manufacturing boom required massive amounts of coking coal and the massive expansion of industrial base meant thermal coal was also in big demand.

Add to that the fact that China was still transitioning its huge economic base from Industrial Revolution manufacturing systems to modern system. That was the big effort to build out its renewable energy resources and its own energy sector.

Now, we’re at the back end of that boom and it has left coal companies around the world reeling. Just as the U.S. firms were beginning to export more of their coal to China to make up for the slackening demand in the U.S., China growth slowed and demand dried up.

Nowadays, the country to watch is India. Coking coal demand may still have some legs left as India tries to develop into a modern economy. But this demand increase won’t be an industry game changer and won’t last long.

What to do about it

Don’t believe the hype. Coal stocks are not the place to be, especially coal companies that specialize in thermal coal. Any demand rebound will be more like a dead cat bounce than a real rally.

Many energy firms have natural gas generators up and running and many of the big utilities has significant interests in natural gas, both for their own use and for sale domestically and internationally.

Again, this is about making money, and there’s more money on the table committed to natural gas’s future than there is coal.

That said, this isn’t the time to buy natural gas stocks yet, either. It’s going to take a while to see where pricing moves and what the impact of exporting natural gas will do to U.S. prices.

Usually, once a country starts exporting an energy product, prices go up domestically as they adjust to the global market pricing. For example, if Japan is paying $15 per million BTU (MM/BTU), Germany is paying $10 MM/BTU and the U.S. is paying $3 MM/BTU, U.S. prices will move closer to the higher prices sellers can get outside the domestic market.

Your best bet in the near term is to stick with midstream energy players — pipeline companies. They will be moving this natural gas as well as U.S. oil. For now, there are no significant natural gas exports going on and building out export terminals is a massive undertaking. As long as natural gas stays home demand will grow.

When the time is right, you can buy in, but now, stick with companies like Energy Transfer Partners (NYSE: ETP), Enterprise Product Partners (NYSE: EPD), Plains All American Pipeline, LP (NYSE: PAA) and Enbridge Inc (NYSE: ENB).

— GS Early

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