Friday, October 26, 2007

Coal Continues to Amaze: Consol Energy (CNX)

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All 4 coal stocks on my watch list continue to romp: Consol Energy (CNX), Peabody Energy (BTU), Arch Coal (ACI), and Massey Energy (MEE) - I own the former 2. Right now you can throw a dart at any of these and make a nice profit; sort of like Chinese stocks but without the word Chinese in the stock name...

Consol Energy appears to be ramping off news it will begin exporting more coal to Europe - this was part of my thesis for this group; after all we are the "Saudia Arabia" for coal and as the Fed helps destroy our dollar and make exports cheaper for foreign countries to buy, this would help domestic based coal producers.

My original thesis for coal is here, with follow up analysis here.
  • Consol Energy (CNX), which already exports about 10 percent of its coal production, plans to increase shipments to Europe where it can get better prices, the company's chief executive said on Thursday.
  • While domestic U.S. customers such as power utilities will remain a priority, Consol sees a growing demand abroad for both its high-Btu, or heat-generating, steam coal and metallurgical, or coking, coal that is used in steel-making.
  • "We estimate that more than half of European power plants are scrubbed," said Brett Harvey, referring to the devices used at power plants to remove pollutants from the exhaust created from burning coal. "This creates a natural secondary market for our Appalachian coal. "The prices that we currently are realizing from Europe are, for the most part, at a premium to domestic coal prices."
  • Consol said it expects steam coal exports this year to increase by more than 40 percent from 2006 and 2007 volumes to rise by approximately 25 percent for 2008.
  • "The export market is sustainable for the next three years for sure," he said. "The question is, will the dollar stay weak and trigger long-term contracts? (my answer is yes! We have to bail out our 'innovative' credit levered financial system - hence need to print more worthless dollars) "If that is the case, you'll see us make capital commitments to that market."
  • In a move that drove up Consol's share price on the day it reported a third-quarter net loss, Harvey said he was seeing coal prices that, according to Wall Street analysts, are higher than current estimates.
  • Consol said it believes the world is moving into a cycle of strengthening demand for coal. Developing countries like China, India, Vietnam and Indonesia are experiencing economic growth, driving demand for both steam coal and metallurgical coal.
  • In some cases, countries that previously had been net exporters of steam coal have become net importers to meet the fuel demands for new coal-fired electricity plants being built to support the growing consumption of power.
  • Steam coal exporting countries with good logistics to the Pacific Rim are shipping fewer tons to Europe, creating an opportunity for eastern U.S. producers.
  • "The market for coal shipped to the growing number of scrubbed power plants in the eastern U.S., will remain our largest and most important market," Harvey said. "However, domestic power plant operators should realize that Appalachian coal is no longer limited to its traditional regional markets. The growing global need for coal and the high Btu content of these coals means that they can travel farther and compete in a larger marketplace."
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Takeaway: I remain a raging long term bull on this sector - the commodity 'left behind'; in the global commodity bull run. With the Fed intent on inflating us out of our 'financial innovation' mess, and thus devaluing our dollars, our multinationals lie in the sweet spot - hence our last few non service industries should benefit immensely.

With that said, this run has been quite large in a short time and with my lack of cash, and discipline in cutting back positions when they rise quickly, I am going to trim this position in Consol Energy (CNX) a bit; not touching Peabody Energy (BTU) since it has a more direct exposure to China through Australia. I will look to rebuy on any dips in this sector as we seem to be moving to a secular bull market here.

My strategy in this sector is not unlike agriculture or infrastructure - when the stocks rally hard, trim some, and rebuy at lower levels but always keep a good core in the portfolio. With Consol Energy up 16% off its low yesterday near $49, this qualifies as a 'rally hard' moment.

I sold 100 of 450 shares in Consol Energy near $57; this raised about $5700. Look at the chart below, does that look like a boring coal stock or a tech stock?

SA/SS

Long Consol Energy, Peabody Energy in fund; no personal positions


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