A Clean Look at "King Coal"

03/17/2006 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

"While oil, natural gas, and nuclear power grab most of the headlines, in most corners of the world, 'King Coal' still reigns," notes Roger Conrad. Here, the industry leading utility expert looks at the growing role and importance of clean coal technologies.

"US coal currently generates half of the nation's electricity, and that share is rising. Coal's biggest long-run advantage for US consumers is its domestic abundance. At current usage rates, it would take at least 200 years to run out. The key disadvantage is it emits harmful pollutants. Coal liquefaction and gasification eliminate pollutants with a series of chemical processes to convert coal into an ultra-clean diesel-like fuel or natural gas.

"Peabody Energy (BTU NYSE) has gone the furthest. Specifically, the company's Alabama coal gasification facility can produce pipeline quality gas at a cost of roughly $5 to $6 per million British thermal units. And it's building a coal-to-diesel plant in China at a cost equivalent to $35 to $40 per barrel oil. Arch Coal (ACI NYSE) is Peabody's closest rival, with four billion short tons of reserves. Reserves are mainly low sulphur, with a major presence in the PRB. More intriguing, it has a growing stake in KFx, a small company with a technology that drastically reduces pollution content in coal. Of the two, Arch is the more conservative play but it is pricey; buy under 85. Speculators can pick up KFx below 17.

""In the clean coal department, Penn-Virginia Resources (PVR NYSE) is the best production play, in part because it avoids worker health and safety liability by renting its lands rather than mining itself. Penn-Virginia is also our top pick in the sector for income. It's a limited partnership that collects royalties on low sulphur coal and natural gas produced from its properties. It has no labor costs or health liabilities and pays a dividend of nearly 5%. Buy PVR up to 55.

"In addition, South Africa’s Sasol (SSL NYSE) is the primary global player in coal and gas to liquids technology and is a buy up to 40. A  small but profitable play is Headwaters (HW NASDAQ). The company is a leader in coal liquefaction technology. The firm has licensed its proprietary coal-to-diesel technology for commercial use in China; and commercial approval in India is pending. Headwaters has been volatile, but it's a buy under 37.50.

"Outside of coal, I'd note that one source of alternative energy that’s proven its commercial viability is wind. There are producers in this area that are making money such as AES Corp. (AES NYSE), which is a buy up to 17, and FPL (FPL NYSE), which is a buy up to 42. Vestas Wind (VWSYF Other OTC), a turbine maker, is a more aggressive play—and takeover target—up to 18. Beyond just wind, I'd also note that the most complete play on alternative energies is PowerShares Wilderhill Clean Energy Portfolio (PBW ASE), an ETF which holds a mix of companies in the alternative energy sector. Buy up to 20."

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