I entered into NRP some time ago, which was quickly an unmitigated disaster. The position is down 25% from my purchase price. I sold half the position, along with other partial positions, back in January when I raised cash.
Today, I added back some of that for $14.93.
I want to talk at brief about coal. The time to buy into US coal reserves is now, while euphoria over natural gas is highest and markets are most spooked about a Democrat directed EPA.
I am in no way minimalizing the importance of the shale revolution. Not by a longshot – if you look at my own holdings, BAS and HCLP represent a firm belief in the continued importance of those assets to the US energy equation.
What I am doing is highlighting the continued importance coal will have in US power generation and abroad.
Coal presently makes up just over 1/3 of US domestic generation. This is down from 1/2 earlier this decade, most prominently replaced by the surge in application with natural gas. Yet, markets price in equilibrium of choices, when operating correctly.
We have to presume that markets will find a price that fairly limits benefits between choosing natural gas versus coal versus nuclear versus…for equivalent production of energy. This would suggest that natural gas prices are set to rise (further enhancing the payoff for the producers). I would also expect that, as excess capacity gets utilized, the adaptation of coal plants to gas will subside.
This process may take a little longer to finish, and perhaps gas will even match coal in terms of energy mix before it is done. What I would not count on is coal rapidly or even ever completely being removed from global energy production.
Which brings us to the fears of EPA punitive measures against coal. So far, these are aimed at coal fired power plants. While this would, at least temporarily, hinder US energy production from coal here at home, what is to stop US coal producers from simply shipping overseas? And why is metallurgical coal acting so volatile when it is not a component of US power generation?
The signs, to my eyes, spell clear a story of market overreaction to pop culture and fantasy. Power generation shifts or slides, waxes or wanes. It does not turn on or off. Coal has been systematically shunned regardless of its exact nature (energy versus metallurgical) and the driving catalyst seems to be mostly political.
But politics change and politics in this country are about to.
I will give you a 6 month synopsis of what is about to happen. In November, the DNC is going to get creamed, delivering the Senate to the RNC. You can suspend your political predilections, as this is merely obvious to anyone not sucking their own exhaust. And the GOP has no problem with coal power generation. In fact, the Republicans think the argument against coal power generation is, quote, “stupid”.
This will change the short term plot dynamics that drive most superficial market players. Around middle of 2015 or early 2016, coal will be “the most obvious buy ever”, whereas today it is “fools nonsense.” Of course, when it is “the most obvious buy ever”, it will be at some considerable percentage above where you can take a position today.
This will accelerate especially if it should appear going into the next presidential election that a Republican is about to take the White House (that is still too far out for me to see, but it is certainly not out of the question). In such an event, the current shunning of coal will look especially stupid and myopic.
Regardless of the next presidential cycle though, the simple act of the GOP taking both chambers of Congress should noticeably shift the messaging surrounding out of favor coal plays. Executive overreach through agency bodies, no longer shielded by the Senate, will begin getting visibly and openly reprimanded; or even punished.
This shift, along with coals critical importance to the US economy and abroad, should render this a generous buying opportunity in hindsight.
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Great post, Cain. I have been a coal guy for a long time, I just have not been very profitable. You’re right about the international demand, specifically in China and India over the coming years. With that, do you have any coal miners you like? I have always been bias to $BTU and $CNX.
At this moment, nothing other than NRP, which I have just under a full position in.
This post is merely laying out the theme of the movement I seek to work on. The character and body of notes remain to be written. Over the next several months I will slowly add structure to harmony.
If the GOP is gonna win? Why is coal not seeing it now? Joined in the trade, but doubt the free shit army will ever lose the WH again. The game has forever changed thanks to the dying broke boomers.
That’s nonsense
Free Shit Army… LOL … Good stuff
Any thoughts on CLF benefiting directly or peripherally from the oscillation back to coal?
Cain,
I believe NRP management is looking to reduce debt, no?
If that’s still the case, they need to issue more shares or cut the distribution again very soon. (which will bring shares down to around $11, I’m guessing)
If that isn’t the case, then I believe they are on the fast track to default.
They already cut the dividend once. It’s possible an equity raise is looming, but I’m not going to lose my mind about it.
No one says they have to pay off all the debt at once. There’s an obvious third option which is they role a portion of it over.
I don’t know if there is a market for their debt anymore, their last issuance was at 9+% and that was back in better days.
Yeah, I’m not overly concerned that coal is just going to magically disappear. It’ll see price increases over the next couple years that make the coal producers a much more attractive prospect, but they’re all so buried in debt on unfavorable terms and continuing to operate at losses that it’s tough to buy in still.
Not all – take a look at ARLP. Their annual net income is guided at 400-460 mil while their debt is only ~850mil. I don’t know how they are doing so well, perhaps good hedging.
Compare that to NRP’s net income (10% of debt) and suicidal 100% payout ratio.
Also, for a play on met coal rebounding, look at CDYCF. They’re an exploration/development stage company that is “hibernating” right now due to met coal being so low, and are trading at 10% of book value.
RNO a smaller producer with a nice yield and good numbers. Own it.
Bloodbath incoming for the whole sector
I know, that’s kind of why I’m starting the buying process.
I like the way you think. I will put these on my watch lists. I also know the king of coal investing and will give him a shout and ask him where he stands.
http://www.foxnews.com/politics/2014/06/02/obama-to-announce-rule-to-limit-emissions-from-fossil-burning-plants-part-his/