Fossil fuels have had a banner year so far. Both prices for oil and natural gas have surged on the backs of higher demand and a dose of geopolitical tension. Likewise, oil and gas stocks – as represented by the Energy Select Sector SPDR ETF (XLE) – have also produced some hefty returns this year.

The same can't be said for old king coal, however.

A host of issues from lower demand to emissions regulation have sent prices for both the underlying commodity and the companies that extract it down into the basement. Several miners have already filed for bankruptcy protection. However, coal’s full-on demise maybe overstated. For contrarians seeking value, the sector could be one of the best buys in today’s market. (For related reading, see: Winners and Losers in the Coal-to-Gas Switcheroo.)

A Host of Issues and Some Promise

For coal, the last few years have been fraught with difficulties. Here in the United States, natural gas has been its undoing. As we’ve fracked our away into shale, prices for natural gas have fallen to lows not seen in decades. Those ultra-low prices, along with the fact that we keep unearthing more natural gas than we can use, has made it the prime choice for utilities for electricity generation. Making the decision easier has been recent legislation hoping to curb carbon emissions. The EPA has basically made the cost of using and building new coal plants uneconomical.

The story across developed Europe is the same, with Germany, France and the United Kingdom opting to use piped natural gas as their primary generation source. As such, the Dow Jones U.S. Coal Index has fallen from a high of 500 reached in 2011 all the way down to its current reading of around 127. And some coal miners, such as James River Coal Co. (JRCC), have recently filed for bankruptcy.

Yet, there are some glimmers of hope for the beleaguered coal sector.

Currently, coal is burned for almost half of all the electricity in the United States. In some states it makes up about 80% of the generation mix. Given that size, analysts estimate that it will take nearly a decade for all the infrastructure to be built to replace coal with natural gas. As such, the EPA might be forced to scale back its ambitions. At the same time, coal use is currently rising. As natural gas prices have once again begun to rise, coal consumption in the U.S. has increased by 8.5% from a year ago. (For related reading, see: The Coal Industry Languishes, But All Is Not Lost.)

Meanwhile, demand is surging from emerging economies that have less stringent environmental regulations. Overall, the Department of Energy estimates that international trade in coal will grow to account for 47% of the fuel market by 2035.

Making A Play For Coal

With a rise in coal consumption, the broad coal index is up this year, though its still a long way off from the sector's all-time highs. That means there’s still a chance to participate in a coal rebound. With the closure of the PowerShares Global Coal ETF (PKOL) a few years ago, the only broad way is through the Market Vectors Coal ETF (KOL). Luckily, it’s a good option for most investors.

The fund tracks 36 different global coal producers, such as SunCoke Energy Inc. (SXC) and Arch Coal Inc. (ACI). Just under 60% of its holdings are outside the United States. That includes a hefty dose of firms located in key emerging markets like China and Indonesia. While that hasn’t necessarily protected the fund against losses, it should help longer-term, as that is were the demand is. Expenses for the fund run a cheap 0.59%. At that price, KOL could be the best broad-play to bet on a coal rebound.

In terms of the big name producers, Peabody Energy Corp. (BTU) remains the top draw for investors. BTU features assets across the world and has its hands in both coking and metallurgical coal. More importantly, many of those mines are surface or near-surface mines meaning they cost less to operate. That’s helped BTU, along with a steady stream of coal exports, to deal with its debt load, increase profits and increase its dividend over the last few years. That’s something that rivals like Alpha Natural Resources Inc. (ANR) can't say.

Speaking of debt loads, many coal miners made huge acquisitions at just the wrong time and many have been suffering under the weight of those buyouts. But not Hallador Energy Co. (HNRG) or Westmoreland Coal Co. (WLB). Neither stock was caught up in merger mania. As such, their debt loads are much more manageable than other coal producers, and the firms should be able to weather any downside in the coal sector with relative ease.

The Bottom Line

The coal sector has spent much of the last few years suffering at the hands of cheap natural gas and environmental regulation. However, investors shouldn’t count coal out. The sector could be primed for a turnaround sooner than later. That means the time to add coal stocks could be now.

Related Articles
  1. Investing

    Can a Venezuela Revolt Impact Oil Prices?

    How a social crisis in Venezuela could affect West Texas Intermediate crude oil and Brent crude oil prices.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  7. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
  4. Unconstrained Investing

    An investment style that does not require a fund or portfolio ...
  5. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  6. P5+1

    The P5+1 is a group of world powers who have been negotiating ...
RELATED FAQS
  1. What country is the world's largest coal producer?

    With over 12,000 mines producing 47% of the world's supply as of 2012, China is the world's largest producer of coal. With ... Read Full Answer >>
  2. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  3. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. Can my child have an IRA/Roth IRA?

    One of the best assets a person can have is an individual retirement account (IRA), and children can have one as long as ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!