Motley Fool
Coal'ed Comfort
Thursday July 20, 4:20 pm ET
By Stephen D. Simpson, CFA
Coal may keep a lot of folks warm during the winter, but it's getting a decidedly chilly reception today.
Coal shares have been weak recently, on fears that pricing will come under pressure from growing production and larger utility stockpiles following a warm winter. Top that off with guidance today from Peabody (NYSE: BTU - News), the biggest shareholder-owned company in the business, about a tough third quarter, and the sector is skidding again.
Not surprisingly, Peabody's latest quarter was pretty good. Revenue rose 19%, as the volume of coal sold rose a bit more than 5%. Pricing was certainly stronger than in the year-ago period, and though costs are rising as well, the company nevertheless saw operating income grow 36% and operating margins improve.
As I mentioned, though, the company lowered guidance for the third quarter, and though it actually lifted the bottom end of the full-year range, folks are selling the stock pretty aggressively today. I can understand the worries about pricing -- coal prices have trended down lately -- but I must admit that I have to laugh when I hear that utilities are seeing reduced power demand while temperatures are hitting triple digits in many places around the country.
I've done a fair bit of work lately on energy stocks, and it's interesting to see how little investors value the reserves of coal companies relative to oil and gas companies. For instance, if you convert the reserves held into oil energy equivalents, no coal company that I follow is valued at even $1 in enterprise value per barrel of oil. Yet fine energy companies like Apache (NYSE: APA - News) and Canadian Natural (NYSE: CNQ - News) are valued in the teens-per-barrel.
Now, I realize you can't just take a ton of coal from Peabody or Arch (NYSE: ACI - News) or Foundation (NYSE: FCL - News), crumble it up, and run your car. But I can't help thinking that the spread in value-per-BTU between coal and oil/gas is likely to shrink as better coal-to-gas and coal-to-liquid technologies come available. So while I'm not sure even I have the fortitude to step in front of sentiment and buy Peabody or Foundation shares, the thought is appealing on a longer-term basis.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
