Is it Safe for You to Buy Coal Stocks Yet?

During the Great Depression, people were lacking a lot of things besides money… and one of the biggest problems was energy poverty.

In order to address this issue, in the Appalachian area, the federal government created the Tennessee Valley Authority (TVA).

Now, this entity was meant to help produce and distribute energy to many disconnected areas. The aim was to modernize the region to restore some of its economic strength.

But while the TVA’s main energy source was hydropower to begin with, by the 1950s, it couldn’t keep up with growing energy demand.

I’ll give you three guesses what its next best option was, but you’ll only need one…

Changing Tides

The answer, of course, is a source of abundant, cheap coal.

Don’t get me wrong; the TVA still uses plenty of coal. In 2008, the fossil fuel accounted for around 60% of the entity’s portfolio.

However, that’s changed pretty drastically in recent years.

In 2011, the growing pressure to cut emissions began the TVA’s major shift away from coal power. The corporation agreed to cut about 2,700 megawatts of coal energy capacity by retiring 18 of its 59 coal-fired units by the end of 2017.

Now, in the grand scheme of things, that’s not much. But it gets worse…

In May of this year, the TVA announced that it would be shutting down an additional 3,000 MW of coal capacity in the next few years. For the record, it will already have shut down 1,759 MW by the end of 2015.

That’s more than half of its 2017 goal — in just one year!

Of course, the usual suspects are to blame: a fall in the price of cleaner natural gas, a rise in regulations on coal use, and even the proliferation of renewable power sources that are becoming increasingly cheaper as new advancements in efficiency are made.

Between 2012 and 2014, coal’s energy share in the U.S. has dropped from more than 50% to just about 39%. In fact, coal’s share of electrical generation in the United States has been surpassed by natural gas — twice this year — as the country’s largest energy source.

And as energy companies back out, investors are rushing for the exit.

I can’t rightly blame them for wanting to dump their coal investments.

One glance at the performances of three of the biggest coal producers — Arch Coal (NYSE: ACI), Peabody Energy (NYSE: BTU), and Alpha Natural Resources (OTC: ANRZQ) — over the last five years is enough to make the most seasoned investor shudder in revulsion:

Click Chart to Enlarge

It honestly doesn’t get much worse than that, dear reader… and yes, we’d do the same thing if our shares were heading in that deathward spiral to $0.00.

Nothing to Bank On

As if things aren’t bad enough, the situation in which these companies find themselves is exacerbated after taking into account the fact that several of our country’s biggest banks have been reducing their exposure to coal mining credit.

Bank of America has been reducing its funding for coal projects for years and confirmed last May that those reductions would continue until the funding was essentially cut.

Citibank announced a similar business move this month, following coal divestments by JP Morgan Chase, PNC, and Wells Fargo in late 2014 and early 2015.

That’s proof enough that the United States’ four biggest banks have lost their confidence in coal — and they aren’t the only ones with this mindset.

Also in May, Crédit Agricole, France’s third-largest bank, announced a reduction of its credit exposure for coal mining. The reduction was aimed at “mountaintop removal mining,” which requires that the tops of mountains be leveled so companies can extract the coal resource present.

Meanwhile, France’s second-largest bank asserted that it would only invest in coal projects with CO2 caps.

Believe me, this list keeps on growing…

Norway’s government recently voted to reduce the country’s investments in coal from its nearly $900 billion sovereign wealth fund.

Even Australia, a major global coal producer, is cutting back. Australia’s ANZ Banking Group has decided to reduce investments in coal production, transportation, and power this year.

And this knife is already stabbing into the sides of coal companies. As you saw above in the ugliest stock chart in history, both Peabody and Arch Energy — two of the country’s biggest coal producers — have each lost more than 95% of their stock value in the past five years.

Also, the second-largest coal producer in the United States, Alpha Natural Resources, filed for bankruptcy in August.

If nothing else, we’re staring at a clear sign of failure when the biggest and best companies in the industry start toppling.

At some point, however, we can’t help but whisper to one another (very, very quietly, mind you), asking if there’s anything that can reverse coal’s death march.

Not Over Yet

Look, I know there are some coal bulls out there somewhere, or at the very least investors who understand global coal consumption won’t just disappear overnight — or even over decades, for that matter.

Always keep one thing in the back of your mind: Despite the gloom and doom within this sector, coal still remains one of the largest and cheapest sources of energy worldwide; it’s still more affordable than any source of wind power or solar power touted these days.

Now, I’m not suggesting that the global push for clean energy that dominates today’s headlines is going away — it isn’t. With that in mind, however, and barring some technological disaster, we will have to simply remain patient until renewables become more cost effective than coal and natural gas.

Yet in the same vein, a technological miracle could just as easily save coal from an untimely exit from our energy portfolio.

And it’s that technology, dear reader, that I believe I may have stumbled upon accidentally. More importantly, the company that holds the patents behind this technology legitimately threatens to solve coal’s “dirty” problem.

I’ll confess that I didn’t believe it at first, either; I’ve lost count of how many times an executive has approached me claiming to have the coal industry’s miracle cure.

Truth is, the skeptic inside me has to see this technology work with my own eyes — which is precisely what I plan on doing very soon. And I’ll tell you every last detail, including whether or not I’ve truly found the holy grail for coal stocks, as soon I’ve exhausted my own due diligence.

Of course, you don’t need me to tell you that this technology, from a ground-floor investment standpoint, is something you and I will find but once in a generation.

I will report back to you shortly.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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