Coal Will Be King For Some Time
05/21/2008 12:00 am EST
Bryan Perry, editor of The 25% Cash Machine, says coal will remain the principal source of electricity in the US, and he recommends a good way to profit from it.
The United States has one of the highest concentrations of coal reserves in the world—truly an abundance of coal. Despite those reserves, coal’s price is becoming more sensitive to foreign demand pressures and events occurring beyond our borders.
According to the US Energy Department, coal exports gapped higher by 19.2% last year in the United States and are expected to jump another 15% in 2008. And with China activating one new coal-fired plant every week, there is definitely money to be made from this increase in global demand and the resultant expanded appetite for American coal.
Almost 93% of all coal in the United States is consumed by the electric power utility sector and independent power producers. Utilities faced with ever-higher raw material costs are raising rates nationwide: The national average retail price of electricity rose 2.3% last year, according to the Energy Department and electric rates could rise by another 5.7% this year. [That] suggests that the rise in electric rates during the next ten years will be double that of the past ten years. And the amount of the nation’s electricity generated by burning coal will continue to grow.
Despite recent price increases, coal is still cheap compared with other fuels. In 2006, for instance, coal cost $1.69 per British thermal unit (BTU), [while] natural gas cost $6.87 per BTU. That’s three times the cost to generate the same amount of electricity. Until the math for other fuels improves significantly, coal will almost certainly power one-half or more of America’s electrical needs well into the future.
Penn Virginia Resource Partners, L.P. (NYSE: PVR) is a master limited partnership (MLP) and a sub-arm of parent Penn Virginia (NYSE: PVA), an independent natural gas and oil company focused on the exploration, acquisition, development, and production of reserves in the United States.
PVR manages coal and natural resource properties and related assets, and operates a midstream natural gas gathering and processing business. At year-end 2007, the partnership owned or controlled 818 million tons of coal reserves in Central and Northern Appalachia, the San Juan Basin (primarily located in New Mexico) and the Illinois Basin.
Since its $12 IPO in late 2001, PVR has demonstrated an outstanding track record of steadily rising share prices and increased distributions. The stock [closed below $28 Tuesday] and has paid out cumulative distributions of $8.72 per share—or north of $36 when capital appreciation and distributions are combined. Nice!
Currently, the distribution yield is about 6.3%, but the upside capital appreciation potential for shares of PVR is at least 25%from current levels. Most commodity-related MLPs have distribution that’s very erratic from one quarter to the next. The payout stream for PVR is smooth and steady, however, and record quarterly distributable cash flow [hit] $32.5 million in 2007, compared with $25.1 million in 2006, [while operating and net income also rose].
Buy Penn Virginia Penn Virginia Resource Partners, L.P. (PVR) under $30.
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