While the Paris climate deal, inked with the support of representatives from 195 countries, is indeed a landmark event, the transition from fossil fuels to a carbon-free economy will come with its share of perils for the so-called “pure play” fossil fuel companies. The focus now shifts to these companies and their efforts to counter the impact of the Paris Agreement on their bottom line.
The Agreement
The accord that comprises 11 pages and 29 articles commits developed and developing countries to lead in eliminating net greenhouse gas emissions this century. The deal calls for developed nations, including the U.S. and European Union, to provide developing nations with a minimum of $100 billion per year to help them counter climate change. On the other hand, developing nations will have to find out ways to curb emissions.
Moreover, the deal sets a target of limiting global warming to “well below” 2.0 degrees Celsius (3.6 Fahrenheit) compared with the Industrial Revolution, while aiming for an even more ambitious goal of 1.5C.
Impact on Coal and Renewable Industry
The climate deal “represents the best chance we have to save the one planet we’ve got,” President Obama said after signing the agreement on Saturday. Though this is definitely going to be a turning point for the renewable energy industry, the prospects of the fossil fuel industry appear to be rather shaky.
The coal industry is already facing a dual challenge – first, rising competition from natural gas and alternate energy as a substitute energy source and second, regulatory rulings to lower emission, which will inevitably lead to a curtailment of coal power generation.
Coal companies that have not significantly diversified into other areas of energy production will likely feel the heat. In fact, shares of coal producing companies plunged on Dec 14. Peabody Energy Corp. BTU dropped 13.15%, Consol Energy Inc. CNX fell 3.72%, Cloud Peak Energy Inc. CLD declined 11.30%, Westmoreland Coal Co. WLB was down 6.38%, Cliffs Natural Resources Inc. CLF dropped 8.61%, Alliance Resource Partners LP ARLP declined 4.01% and Arch Coal Inc. ACI was down 1.10%.
On the contrary, solar stocks like First Solar Inc. FSLR, Canadian Solar Inc. CSIQ, SunPower Corp. SPWR and SolarCity Corp. SCTY rallied yesterday increasing 5.70%, 5.03%, 8.17% and 12.28%, respectively.
Coal producers are already battling a drastic fall in demand and consequently coal prices, which has taken a toll on their earnings performance. To make matters worse, the latest treaty may call for a range of policy measures comprising harder environmental regulations, taxes on carbon, and shifting of government subsidies.
Stocks to Combat the Scenario
Notwithstanding the many hurdles in coal’s way at present, this fuel source still holds an advantageous position due to its wide availability and lower cost compared to other fossil fuels and renewable sources of energy. Even the current availability of coal outpaces the combined proven reserves of oil and gas. Considering this, we may look into the following coal stocks that have strong potential to fight the situation:
CONSOL Energy Inc., based in Canonsburg, PA, is a multi-fuel energy producer and an energy services provider, primarily catering to the U.S. power producers. The company principally operates two business divisions: coal mining and oil and gas exploration and production. CONSOL Energy has shifted its focus to natural gas production and continues to acquire acreage in regions anticipated to have a large volume of gas reserve.
Its decision to form a thermal MLP, CNX Coal Resources LP, zero-based budgeting plan and debt reduction initiatives are going to benefit it in the long run. The stock holds a Zacks Rank #3 (Hold) with an expected 3-5 year earnings growth of 12%.
St. Louis-based Peabody Energy Corp. is the world’s largest private sector coal mining company, owning majority interests in 26 mines in the U.S. and Australia and a 50% equity interest in the Middlemount Mine in Australia.
Peabody Energy has a competitive advantage due to its Australian platform, which offers greater access to emerging Asian economies such as China and India. In addition, Japan and South Korea import a substantial volume of Peabody's coal. Australia, by virtue of its location, is uniquely positioned to service Asian coal demand.
During third quarter 2015, Australian cost per ton improved 28% to $48.11, primarily due to the benefit of lower currency and fuel rates, productivity improvements, workforce reductions and operational changes implemented in the second quarter. Peabody Energy holds a Zacks Rank #3. The company’s earnings for 2015 and 2016 are expected to rise 5.74% and 16.01%, respectively.
Also based in St. Louis, Arch Coal Inc. is one of the largest coal producers in the U.S., operating 22 mines across the major coal basins of the country. The company serves customers in over 20 countries and sells coal to power plants, steel mills and industrial facilities under long-term contracts.
Amid this changing coal landscape, we still see long-term prospects for coal stocks fed by demand from the Asian countries. Japan, India and Pakistan are also planning to use higher volumes of thermal coal going forward. A World Steel Association report projects an increase in global steel usage by 0.5% in 2015 to 1,544 Mt and 1.4% in 2016 to 1,565 Mt. This will likely kindle demand for met coal. Arch Coal currently holds a Zacks Rank #3.
To Sum Up
The importance of coal in the fuel source chain is far from over. For the aggressively growing and energy-hungry Asian economies, coal seems to be the most popular source of power generation in spite of the inroads being made by renewables.
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