2013 has come and gone, but it was a pivotal one for coal because natural gas prices rebounded to the point where it was now more economic to burn coal from select regions than natural gas. That should help to stabilize the coal market, but there are some companies better positioned than others. So, while contrarians still have time to get into this slowly recovering industry, you want to make sure you pick the right stocks.

The good news
According to the Energy Information Administration (EIA), "...the natural gas price at Henry Hub was between $3.50 per million British thermal units (MMBtu) and $4/MMBtu for most of 2013, making it more economic to burn [Powder River Basin (PRB)] and [Illinois Basin (ILB)] coals and many [Northern Appalachia (NAPP)] coals than it was in 2012..." That's why utilities, which are huge coal users, shifted back towards coal during the year.

This didn't show up in the numbers, however, because utilities burned coal from their stockpiles rather than ordering new fuel. That's healthy since the increase in the number of natural gas power plants likely means that lower coal stockpiles will be the new norm. Burning down stockpiles gets the market closer to the new equilibrium.

Unfortunately, not all regions were so lucky: Central Appalachia (CAPP) coal "remained mostly uneconomic at the 2013 gas price levels and continued losing market share as users accelerated efforts to shift to..." other coal basins. It's part of the reason why CAPP coal production fell by 7%, while production out of some coal regions actually increased. The ILB led the way with an impressive 5% advance.

Middle America's mines
That puts Alliance Resource Partners' decade-plus long streak of sequential record results in a new light. It operates almost exclusively out of the ILB and has been able to offset weak prices with increased production. While a portion of that has to do with a good sales team, a big factor is that the ILB is gaining market share from CAPP.

While Alliance is the best choice if you are looking to pinpoint the ILB, it isn't the only player in the region. Industry giant Peabody Energy is also a notable player in that coal basin, and unlike Alliance, Peabody also has a huge presence in the PRB. While production there was down 2% last year, the EIA thinks that stockpile patterns suggest that PRB coal, the cheapest coal in the country, will be the first see increased demand.

If you are looking for diversification you can't beat Peabody, which also gets about half of its business from Australia. but Cloud Peak Energy will likely see a bigger benefit if PRB coal rebounds. That's because this miner focuses exclusively on the region. And, like Alliance, Cloud Peak hasn't bled any red ink through coal's travails. That's a boast that Peabody can't make.

Buy-one-get-one deal
In fact, if you like the idea of Peabody's diversification you might want to buy Alliance and Cloud Peak instead. Peabody's foreign exposure increases diversification but adds a new set of trends to monitor. On top of this, Peabody is also a big player in the metallurgical coal market, which is suffering through its own price declines.

Alliance and Cloud Peak predominantly serve the domestic utility market out of the two best positioned coal regions. To that end, it's instructive that CONSOL Energy just sold about half of its domestic thermal coal operations, specifically shedding mines in the Appalachia region.

That move allows CONSOL to focus on its growth prospects in the natural gas space and on exporting coal through its solely-owned terminal on the East Coast. It's also a real world assessment of the Appalachian region's prospects. That, coupled with the EIA statistics, is pretty good reason to be careful where you tread in the coal market. Take all of this into account, and Cloud Peak and Alliance are probably the two best positioned domestic coal miners today.

Coal might not be used forever, but we like these companies over the long-term

As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


The article Eastern Coal Miners Just Can't Keep Up Right Now originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Investing in Startups

The lucrative and risky world of startups.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

The price equivalent between gasoline, diesel, and natural gas is wide apart. We are shifting to natural gas to power buses , trucks, and later trains. We will not depend on natural gas for more electricity generation if you ask me. We will return to coal, I can guarantee you that. Natural gas is a luxury when it comes to power generation.We dont need it. Coal may be dirty but what about firewood... if we ban firewood then you can argue with me about which is dirtier , coal- firewood. Not now yet, as people are not getting their heads together yet.

January 28 2014 at 4:31 PM Report abuse rate up rate down Reply

Would you want to have gasoline delivered to your household by pipe so you can fill your car up at home instead of going to a local gas station? You would probably say no cuz it is dangerous. Natural gas is no different. There had been frequent occurences of explosions with natural gas everyday! Natural gas is more valuable as a portable fuel so it is a luxury to use it to run power generators for all it matters. Why we shifted to natural gas from coal for power generation of lately? Well, I can only guess that natural gas was unrealistically cheap of lately, so why not take advantage of it as well as getting the recently and newly fracked reserves pumped out now not later to help producers pay back debt . Coal will return as the king of electricity generation before you knew it. Coal is not portable so it has more value as a power generation fuel than natural gas. Coal is not going to be burned too close to civilization though there is still a few of them a bit too close. People loath and hail coal as the dirtiest fuel around while stoking firewood in their fireplaces and pollute neighborhood air all the same. People have environmenalists all eager to back up the argument for firewood as "carbon neutral" fuel as opposed to coal which is better left in bed for eons more to come.. What is the difference , you ask yourself? What about the health effects of firewood smoke, hey, dont tell me that you have many friends as doctors and nurses standing by and ready to help patients thrive in their sick beds ? UHUH/

January 28 2014 at 4:22 PM Report abuse rate up rate down Reply