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Coal Stocks With Clean Energy Potential

Posted: Sep 22, 2009 10:20 AM by Sham Gad

Tickers in this Article: CNX, WLT, BTU, ICO

Despite what you may hear or read about coal, its use in the U.S. isn't going away anytime soon. In fact, such mythical beliefs have lead to some intriguing investment candidates.

Let the Facts Speak for Themselves
According to the world's largest coal producer, Peabody Energy (NYSE:BTU), coal is the world's fastest growing fuel based on consumption, far outstripping oil and natural gas. Consumption grew at an annual rate of 5.7% over the past five years compared to 1.4% for oil and 3% for natural gas. This trend will continue as global coal demand is expected to grow 55% by 2025.

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Additionally, the U.S. has abundant coal reserves, enough to last the country for decades if not centuries, depending on the estimate you use. With both sides of the political aisle eager to wean America off of foreign oil, coal looks good.

Also, coal is the lowest cost source of energy. And seeing that the majority of our electiricy comes from coal-powered utitlity plants, I don't think anyone is looking at increasing the electric bills of today's consumers. (For related reading, check out Peak Oil: What To Do When The Wells Run Dry.)

Clean Coal
The big disadvantage of coal is the hazardous gases it produces in our atmosphere, namely carbon and sulfer, when it is burned. However, clean coal technology has come a long way and the most exciting is the carbon-capture technology, whereby carbon is captured safely beneath the Earth's surface as opposed to being released into the air.

Finally, metalurgical coal is an essential ingredient in steel production, and steel is an infrastructure necessity. Thus it should come as no suprise that China and India have huge appetities for coal.

Major Players
Aside from Peabody, great plays include Walter Energy (NYSE:WLT) and CONSOL Energy (NYSE:CNX). Walter has spent the past couple of years divesting assets in order to transform the company into a pure play coal business. Walter's niche is the metallurgical coal market for steel production. This coal commands a premium to the cheaper thermal coal used in electricity production. With steel capacity at a multi-year bottom, its gradual improvement should take Walter along for the ride. At nine times earnings, it's worth a look. In the case of CONSOL, it mines both coal and the gas that is created in the mining process. Translated: low cost of gas production.

The most intriguing play may be small cap International Coal Group (NYSE:ICO), a collection of coal mines put together by none other than Wilbur Ross. Ross is known for buying assets on the cheap during times of distress, turning them around, and making a big profit. He did it with steel and ICO appears to be similar. He bought the mines that now constitute ICO .

What you have now is a coal company with nearly a billion tons in reserves, 328 million of which are metallurgical coal. The market cap is about $600 million, and the enterprise value is about $900 million. Shares are at $4, up from $1.50 due to the stability in the economy and commodity markets. Continued improvement and stabilization could further appreciate the value of ICO's assets.

Bottom Line
Coal is essential to our society. It generates electricity and electricity improves human prosperity. With tremendous effort supporting clean coal, you begin to see how much our society depends on it. As the world continues to find a way to minimize the impact that coal has on our environment, coal becomes an even greater asset. (For related reading, check out Can Business Evolve In A Green World.)

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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