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The state of coal stocks is strong
After the State of the Union address, we know this: It's going to be business as usual in energy policy. That removes a big part of the risk in coal stocks.
By Jim Jubak
That was a "business-as-usual" State of the Union address President Bush delivered on Tuesday. No big initiatives. Little new money, even for priority programs. Hey, you don't set the ship of state on a new course by re-upholstering the chairs in the passenger's lounge.
If you're worried about the state of the union, this lack of action may leave you quivering in fury. And, conversely, if you like the direction we're going in, it's likely to leave you quite satisfied.
But no matter where on that spectrum your emotional reaction to this business-as-usual speech falls, the lack of new initiatives means the federal government isn't going to rock the boat in the energy sector. And that sends a very clear message to investors.
Buy coal stocks. (Yes, I'm saying it again.)
Even after the huge run-up they've had. They are the clear winners in the U.S. energy sector for the next five years or longer.
Coal, which went into the speech as the leading "alternative" to oil and natural gas, comes out of the State of the Union as the big winner because the president didn't propose anything to change the current market momentum. Similarly, other alternatives, from solar to wind to nuclear to hydrogen, are big losers from business as usual.
State of the Union
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Playing the percentages
If you listened to the State of the Union address with even half an ear, you couldn't miss President Bush's call to action on energy. "America is addicted to oil, which is often imported from unstable parts of the world," the president declared. "So tonight I announce the Advanced Energy Initiative, a 22% increase in clean-energy research at the Department of Energy to push for breakthroughs in two vital areas. To change how we power our homes and offices, we will invest more in zero-emission coal-fired plants, revolutionary solar and wind technologies, and clean, safe nuclear energy. We must also change how we power our automobiles. We will increase our research in better batteries for hybrid and electric cars, and in pollution-free cars that run on hydrogen. We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips and stalks or switch grass. Our goal is to make this new kind of ethanol practical and competitive within six years. Breakthroughs on this and other new technologies will help us reach another great goal, to replace more than 75% of our oil imports from the Middle East by 2025."
Related news and commentary on MSN Money
The first rule in listening to any speech is this: Beware a politician bearing percentages. So it's critical to ask what that 22% increase in money really means.
The 22% increase in spending for the Advanced Energy Initiative in the budget for the fiscal year that begins in October 2006 breaks down this way:
- $218 million more for clean-coal technologies (Actually this isn't new money but spending accelerated from future budgets.)
- $54 million for technology to capture the carbon dioxide produced by coal plants
- $236 million more ($289 million in total) for hydrogen-fuel technologies
- $83 million more ($148 million in total) for solar power
- $39 million more ($44 million in total) for wind power
- $59 million more ($150 million total) for producing ethanol from plant waste
- Proposed increase: $903 million minus the $218 million already budgeted, or $685 million.
Pardon my French, but that's a squirt in a hog's eye when it comes to federal spending, and it won't do much to shift the momentum of the $13 trillion U.S. economy.
To put that $685 million in context, last summer's energy bill provided $2 billion in tax breaks for oil and gas drillers over the next five years. And the solar-energy plan recently approved by the California Public Utilities Commission provides $3 billion in subsidies over 11 years to businesses and individuals for installing solar-energy systems. That, California officials estimate, would be enough to power 2.2 million homes and eliminate the need for six modern fossil-fuel burning power plants.
The second rule in listening to a Washington speech is, of course: Watch the long-term forecasts. The president's goal is to reduce oil imports from the Middle East by 75% by 2025. I wouldn't hold my breath waiting for the payoff from the Advanced Energy Initiative, if I were you.
If the president's plan is too little to change the momentum of U.S. energy production and consumption anytime soon, that would leave current trends intact.
And those trends favor coal. I laid out the trend toward coal in my Jan. 24 column, "6 ways to invest in the coming coal boom." To summarize, the U.S. Department of Energy's Energy Information Administration projects that coal consumption in the United States will climb by 73%, to 1.9 billion short tons in 2030 from 1.1 billion short tons in 2004.
Picking up steam
The trend toward coal is still in its early stages, too -- the period when trends tend to accelerate before settling into a second stage of maturity, when growth hits a steady rate and way before any decline. Utilities are just starting to shift their orders for new power plants to coal-fired turbines and away from natural-gas turbines. Turbine makers project that coal-powered units will make up about 40% of all orders for electricity turbines in the next 10 years. In 2000, coal's share was 25% to 30%.
And now, after the State of the Union, investors know that while the state of California may be budgeting to replace six fossil-fuel fired power plants with solar panels, the U.S. government isn't about to follow suit.
Absent intervention from Washington, the trend toward coal, already strong, will build on its own momentum. Just look at Headwaters (HW, news, msgs), a company that specializes in cleaning coal, turning coal waste into useful building products and developing new technologies for turning coal into liquid fuels. In recent management discussions, Headwaters officials have sounded positively calm about the possibility that the federal government will phase out its subsidies for turning coal into liquid fuels. The company would like to see those subsidies, known as Section 29, run through 2007 as currently scheduled. But with oil at $65-plus a barrel, the subsidies are no longer make or break for this coal-technology company. The market is moving in the company's direction with or without federal subsidies.
Investors might also want to note that this $1.5 billion market-capitalization coal-technology company is profitable enough to spend $12 million on research and development and still generate earnings of $2.79 a share for the fiscal year that ended in September 2005 on $1.1 billion in sales.
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