7 Energy Stocks That Investors Have All Wrong (Update1)
BOSTON ( TheStreet) -- There's a shift in U.S. power-production resources from coal to natural gas. But don't write King Coal's obituary just yet.
And, on the other side of the equation, stronger demand for natural gas has created new investment opportunities, as seen by the jump in exploration-and-production stocks. But some of the best returns may eventually come from transportation and storage.
Coal shares have slipped across the board in recent days in the wake of a report that U.S. power plants are consuming about 22% less coal than last year, hurt by a warmer winter. And then on Tuesday, the Environmental Protection Agency proposed its first-ever standards to cut carbon dioxide emissions from new power plants, which is a blow for coal and a plus for plants fired by natural gas as they have low emissions.
Industry bellwether and the world's biggest coal producer, Peabody Energy (BTU) , fell to a 52-week low this week and is down 58% over the past 12 months. Others in the industry have been hit hard as well.
Meanwhile, the S&P 500 is up 12.4% so far in 2012.
It looks bad for coal, but bailing out of industry stocks now might be a mistake, first, because many coal companies have guaranteed contracts that will get them through the current year without a major blow to earnings, and second, many of the biggest coal companies are multinationals, with mines and customers worldwide and the demand for coal outside the U.S., particularly from China, is booming.
Peabody's CEO said at an industry conference on Monday that "coal has been the fastest-growing major global fuel and is expected to become the world's largest energy source. The seaborne coal market has exceeded 1 billion tons for the first time, and the cost of coal is just a fraction of global oil and liquefied natural gas."
And he said that, as an example of that demand, in the last four months of 2011, China's coal imports rose 40% from the year before, while India's thermal coal imports rose 35% for all of 2011, and it is taking steps to eliminate its coal import tariff.
As for the EPA's proposals, they are seen mostly impacting new coal-fired power plants, although existing ones will have to retrofit their facilities to meet the new standards or convert them to burn natural gas instead of coal, which is an expensive undertaking.
But Sterne Agee analyst Michael Dudas said in a research note Wednesday that the EPA's rules will have "minimal impact on coal-fired generation in the foreseeable future."
He says coal stocks, which have been hurt by the big inventories on hand and the need for miners to cut back production, may now be undervalued. He has "buy" ratings on several, including Peabody and Alpha Natural Resources (ANR) . "We continue to believe coal equities are reflecting a much more onerous pricing and volume environment than we anticipate during 2012-2014," Dudas wrote.