Investors are weighing their options when it comes to gas vs. coal

Jun 08 - Register-Herald (Beckley, WV)

In a few weeks a new round of quarterly financial statements from energy companies will fill the e-mail inboxes of investors, brokers and even reporters.

The reports, as always, will be written in esoteric language hoping to hide the fact that many energy companies are losing more money than they are making. Well, that's true for the coal companies. The natural gas companies' financials lately are somewhat sexier, at least to Wall Street .

And there is the crux of the issue. In the energy realm, natural gas companies are struggling but have a white-knuckled grip on profits while the coal industry is simply imploding.

Look no further than the last fiscal quarter. Arch Coal , once a giant, reported a net loss of $113 million , or .53 per diluted share between Jan. 1 and March 31 . Another coal giant, Peabody Energy Corp. , reported a 5.5 percent drop in first-quarter revenue due to falling prices and a slowing in its Chinese market.

In its last quarterly report Arch Coal wrote the company is lowering its "projections for U.S. coal demand and production in 2015," citing competition "from cheaper natural gas."

There it is, three of the newest dirty words in the coalfields: cheaper natural gas. Some, perhaps a large percentage, of the revenue drop in coal is related to the falling price of natural gas. This region is feeling the substitution effect of swapping coal for natural gas used in generating electricity. Just recently, Appalachian Power decommissioned three coal-fired power plants in West Virginia .

But what everyone from coal miners to business owners in the region wants to know is whether natural gas is actually driving market share away from coal and, if so, how much is driven down by competition from gas and how much is driven down by government regulation?

Examining the way U.S. electricity is consumed, historically coal played a titanic part in keeping the televisions on and industries running. And much like the ill-fated ship, coal's use in generating electricity was once viewed as unsinkable.

Another, and perhaps most important, part of coal losing to natural gas is pricing. Power giant American Electric Power Co. , which has the monopoly on providing electricity to West Virginia , has said it's cheaper to use natural gas than coal. Thermal coal still is cheap and plentiful, but natural gas has become cheaper and more plentiful in the last few years, taking away market share from coal producers as the fuel of choice.

But this is something new and to some a bit of a shock. As recently as two years ago, an October 2013 an article titled "Coal Displacing Natural Gas Already" published by the Energy Policy Forum states, "We can now safely assume that (natural) gas is priced out of the market for electricity generation somewhere between $3.50-$4 per million cubic foot."

A lot has changed since then. Natural gas was trading around $2.78 per million cubic foot on the Henry Hub last Wednesday, although natural gas prices have been see-sawing the last couple of weeks. However, would a significant rise in natural gas prices cause operators to jump back to coal?

Analysts don't say no, they say heck no. Viewed through the political lens, "clean natural gas" replacing "dirty coal" polls well, especially when the political focus over the last few years has been on reducing carbon emissions. Strict federal regulations have placed a full nelson on the coal industry. Except for the elected officials representing the half-dozen or so coal-producing states, politicians like talking about low energy costs and cleaner air.

Coal companies from Arch to Xinergy believe they are under attack from regulators concerning the Environmental Protection Agency's proposed emission limits and point to that when they talk of the decline in demand for coal. As a result, companies are laying off thousands of employees. In the last three weeks nearly 2,500 workers were either laid off or given WARN notices in West Virginia and Kentucky .

But speak with people in the electric power industry, and they say in a hushed tone that coal-fired plants are cumbersome and difficult to operate, whereas natural gas plants are cheaper to operate and turn on and off. Gas is supplied via pipeline, not rail car like coal. Just flip the switch, they say, and the gas flows.

But the substitution effect can happen only if there is capacity on the natural gas side. And right now there is. Recently, U.S. Energy Information Administration figures showed there are about 2,266 trillion cubic feet of technically recoverable natural gas in the United States . At the rate of U.S. natural gas consumption in 2014 of about 26 trillion cubic feet per year, the country has enough natural gas to last about 87 years.

In its 2015 Annual Energy Outlook the EIA stated coal's share of the total U.S. energy production will remain slightly more than 20 percent through 2040. In 2013, coal made up 44 percent, while natural gas made up 42 percent.

Back to those financials. None of the analysts interviewed said they expect rosy reports from coal companies the first and second week of July when quarterly reports are released. Some pointed to headlines in financial publications; perhaps some, such as Mineweb.com 's "US coal stocks tumble," are a bit tame. A number of companies are restructuring while in bankruptcy protection, while many others had their debt downgraded to junk status.

In the past year, the Dow Jones U.S. Coal index nosedived 45 percent. Analysts said there are "real possibilities" that after bankruptcy restructuring some coal companies could still face a liquidity crisis in the summer or fall of 2016 when part of their revolving credit line matures. Nobody from Alpha, Arch, Peabody or Patriot returned calls seeking comment last week.

In the last few months, West Virginia's coal industry has grappled with layoffs, bankruptcy and shutdowns.

Two companies with regional operations have filed bankruptcy -- Xinergy Ltd. , which operates mines in Greenbrier and Boone counties, and Patriot Coal Co. , which has seven mines in southern West Virginia and its headquarters in Scott Depot .

Three mining companies, all with operations in West Virginia , had their debt downgraded to junk territory recently. Arch Coal operates six mines in West Virginia , including the Beckley Complex in Eccles . Walter Energy operates the Maple Mine in Fayette and Kanawha counties and the Gauley Eagle mines in Nicholas County . Blackhawk Mining runs the Hampton Complex in Mingo and Logan counties.

Alpha Natural Resources is idling its subsidiary, the Rockspring Development Camp Creek Underground Mining and Processing Plant in Wayne County .

The Central Appalachia coalfields have witnessed more than 7,000 coal-mining jobs eliminated within the last three years, according to various sources.

Robert Murray , president and CEO of Murray Energy, West Virginia's sixth-largest private employer, recently predicted more struggles are ahead for the coal industry.

"Every major coal company in this country is either going to be broken up or sold or in bankruptcy except two. And I hope I am one of them. And this will happen by the end of the next year," he said.

Currently, all industry indicators point to more body blows aimed at coalfield communities; more layoffs are expected in the near future.

Wall Street analysts aren't predicting doom and gloom like Murray. Instead, they say a long-term outlook is needed for the coal industry. While they still believe in the need for coal and say that there is light at the end of the tunnel, what they really want to know before hedging too many bets is just how long that tunnel stretches.

-- E-mail dtyson@register-herald.com ; Twitter @DanTysonRH

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