I’m an optimist and look for the good in stocks (like people), but don’t like the Supreme Court’s decision to push the proposed regulations of coal fired power plants out until after the presidential election. The death of coal is near and my thoughts on Alliance Resource (ARLP, Financial) (AHGP, Financial), which I wrote about at prices 25% higher than today, have changed.
The Supreme Court’s order is temporary and is not a ruling on the merits. It simply indicates that the court’s conservative majority has misgivings about the emissions plan, which could hurt the Obama administration’s ability to follow through on U.S. commitments in the Paris climate deal.
Every intelligent person can agree that we are headed for warmer temperatures because of climate change. Everyone seems to be looking at the problems instead of the opportunities -- just not in coal. In fact, Goldman Sachs (GS, Financial) stated that the decline of the industry is “long-term” and “irreversible.” I agree.
New innovations across the energy sector (e.g. solar and hydro) will be necessary going forward. In fact, the entire energy sector could be ripe for a major shift with new players leading the future.
At any rate, I admit that with Alliance Resource, I went bottom fishing. The stocks are still earning money, and yes, they pay a very good dividend. That would minimize the total loss investors could experience if the stock keeps going south.
Coal is a chemically complex fuel. Whenever it is burned, gases are given off and particles of ash are released. While it’s still one of the most valued energy sources on Earth, the sulfur in coal combines with oxygen to form sulfur dioxide to be a major source of air pollution and CO2.
Last June, Norway's Parliament voted in favor of a move to dump its coal-related investments from the country’s $890 billion pension fund portfolio. This along with the 188 nations at the Paris Climate Change Conference offering plans to steadily reduce carbon emissions means the end of long term profitable investing in coal and coal stocks.
I think it’s inevitable coal companies will fail. The good news for investors is that Alliance Resource could potentially pay hefty dividends until it folds. While Alliance generates close to a 40% return on equity, has $320 million in net income and $446 million in free cash flow, they already pay out more in dividends than the company earns.
In fact, as of March 19, railroad Union Pacific’s (UNP, Financial) combined coal and coke carloads was down by a whopping 44.4% year over year, dropping to just under 16,000 units from about 28,000 the previous year. Also of note, Union Pacific saw coal related revenues drop 22% for 2015, and coal’s share of the company’s total revenues fell almost 16%. This is just another key sign.
Renaissance Technologies owns over 670,000 shares, but for the RenFund, it’s such a minute position that a total zeroing out wouldn’t make a flea bite of a difference. If you have the same position exposure and want to take the risk, no problem, but I’m going in the opposite direction.
Alliance Resource will likely never see an increase in its distribution, and the current dividend may remain intact, providing a 20% yield at the current price. But over the next five years, it’ll be wiped out and the stock will be in the single digits.
