Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Tuesday, August 08, 2006

The Next Big Energy Investment: Coal & Implications for BTU, SSL & ACI

By Yaser Anwar, CSC of Equity Investment Ideas

Coal may overtake oil as the best performing energy investment, due to the fact that coal is the cheapest, most abundant energy source. The surge in oil has encouraged people to plan new coal-fueled power plants and to start using conversion technologies such as coal-to-diesel.

Like tarsands, converting coal into liquid fuel or natural gas becomes economical when oil remains above $40 a barrel. Coal is a good alternative to oil not only on an economic basis but also environmental & emission basis.

For the US and China, the world's biggest energy users, coal offers the chance of reducing their reliance on Middle East oil that has tripled in cost since 2002. The US has enough coal to last almost two centuries and today imports two-thirds of the oil it uses.
Using more coal is part of President George W. Bush's initiative to make the US less dependent on imports. US Defense Secretary Donald Rumsfeld in May authorized the Air Force, which burned 3.2 billion gallons of jet fuel last year, all refined from crude oil, to begin testing 100,000 gallons of a similar fuel derived from natural gas and coal.

South Africa's Sasol, which developed coal-to-liquids technology to reduce the nation's reliance on oil, has won the endorsement of the airline industry for a jet fuel mix half derived from coal, and has sought approval for a 100 percent coal-based variety. The technology has helped turn Sasol into Africa's most profitable company and biggest by market value.

Investors value coal reserves at a fraction of oil deposits. Peabody Energy's reserves are worth 7 cents per million British thermal units, a measure of energy content, based on the company's market capitalization. At today's share price, Exxon Mobil's oil deposits are worth $3.16 a million British thermal units. That gap may narrow, raising the value of coal relative to oil, as more plants are built that allow coal to compete with oil.

Too much of a discount is being paid for coal equities at the moment given their inherent energy value and long-term ability to provide growing returns. Coal producers over the next decade are more likely to generate superior returns over oil companies

This underlying trend benefits: Peabody (BTU), Sasol (SSL) & Arch Coal (ACI) the most. I'm currently finishing my analysis on the coal sector. Look for my recommendation to come out sometime this week, if not, next week for sure.

Source: Bloomberg

Powered by Blogger