The End of Coal?

The End of Coal?

Many pundits may believe that the age of coal is over, but the investment bankers at Tudor Pickering Holt & Co. believe there’s plenty of money to be made by buying certain coal stocks.

Yesterday, the Houston-based investment banking firm, which has been covering oil and natural gas companies, announced that it will begin covering the coal sector. And today, the company declared that Consol Energy, (ticker: CNX) a Canonsburg, Pennsylvania-based company offers investors the best upside of the major coal producers. (Disclosure: I don’t own any Consol.)

Lots of analysts cover the coal sector, but the fact that Tudor Pickering has begun covering coal intrigues me because I have a lot of respect for the work done by the firm. Their daily email blast, called “Energy Thoughts,” is a must-read. So what are the smart guys at Tudor Pickering saying? Well, they have a buy rating on Peabody, Arch Coal, and Consol. Of the three, they are most bullish on Consol, predicting that the company’s stock, which now sells for about $34 per share could go to $55, an upside of some 60%. The punchline of their valuation estimate is this line: “A two-fer deal, buy a coal company get a shale gas play for free.”

Tudor Pickering expects Consol (which has a market capitalization of about $8 billion) to dramatically increase its metallurgical coal production over the next few years, but it also sees major opportunity in the company’s natural gas production. Consol recently bought acreage in the Marcellus shale play and the company’s natural gas production could increase by 30% per year through 2013. “If you like gas going forward, you should love CNX. If gas prices rise, that gives eastern coal prices room to move higher plus CNX earns more coin on both their gas and coal production (double-down on gas). While we aren’t really gas bulls, the compelling asset value gap here has us intrigued. Clearly, the market doesn’t “get” CNX or doesn’t believe the story. As neither fish (all coal) nor fowl (all gas), the stock evidently isn’t owned by anyone that wants the pure play exposure of those commodities.”

To be sure, coal isn’t as sexy as wind turbines or solar panels. And when it comes to political correctness, coal isn’t.

But a quick look at the numbers shows just how important coal is to the US and world economies. In 2009, US coal consumption averaged 10 million barrels of oil equivalent per day. That’s a 52.3% increase over 1973 levels. Meanwhile, natural gas consumption over that same time frame (1973 to 2009) increased by just 3.8% and oil consumption increased by just 3%. Globally, coal consumption now totals some 65.8 million barrels of oil equivalent per day, a 107.5% increase over 1973 levels.

As I wrote earlier this week about the slow pace of energy transitions, it’s easy to talk about why the US and other countries should quit using coal and other carbon-based fuels. But the numbers show, once again, that hydrocarbons are remarkably persistent. And that’s one reason why the smart-money bankers in Houston are placing some of their bets on coal.

Ed note: On Friday, August 20, Brandon Blossman of Tudor Pickering sent out an email which said there was an error in their model on Consol. The result: their target price should have been $55 rather than $65. The change has been made in the text of this story.

© 2013 Energy Tribune

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