Coal-to-Gas Switching Might Reverse in 2013 (ACI) (ANR) (UNG)

January 4, 2013 11:04 AM EST
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Depressed natural gas prices caused havoc in the coal sector last year. In the past 52-weeks, shares of Arch Coal (NYSE: ACI) and Alpha Natural Resources, Inc. (NYSE: ANR) declined by over 50 percent. Peabody Energy Corp. (NYSE: BTU), Walter Energy, Inc. (NYSE: WLT), CONSOL Energy Inc. (NYSE: CNX)... the list goes on and on with results varying only in terms of degree of pain.

According to FBR Capital, coal-to-gas switching was approximately 3.1 Bcf/day in 2012. The degree of switching varied sharply in 2012, reaching a high of 5 Bcf/day in the spring and trending slightly negative by the end of the year. Looking forward, analysts expect the trend to reverse in 2013.

"We envision about 1 Bcf/day to 2 Bcf/day in switching back to coal," said analyst Marc de Croisset. "This corresponds to 50 TWhs to 100 TWhs of generation shifting from gas to coal across the U.S."

His estimate is premised on natural gas prices between $3.50/MMBtu and $4.00/MMBtu.

This week moderate weather forecasts caused natural gas prices to declined below $3.20, although they have since recovered and now trade near $3.3. This might be causing some coal investors to reach for the antacids again, but based on the 5-day performance of Market Vectors Coal ETF (NYSE: KOL), others aren’t nearly as worried. The ETF is higher by 5 percent since last Friday.

This morning EIA weekly data showed gas stockpiles declined 135 bcf vs. 130 bcf expected. In response, United States Natural Gas ETF (NYSE: UNG) gained 2.5 percent, with a corresponding rise seen in nat-gas futures prices.

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