Hmmm... I recently loaded on some BTU during the pullback. I am wondering if you have a target price to exit the position? Do you use coal price as the indicator? When coal supply starts to ramp up by a lot, and prices cool off, then we sell BTU and other coal equities?
I don't have a target price, instead I will wait and see how much pricing power they have in the Q3 and Q4 earnings calls in order to determine what '22 PRB contract pricing will look like. If '22 contracts are materially better than '21 I expect the stock to re-rate much higher.
I use a bunch of coal indexes as indications of demand. Supply is considerably constrained at the moment, we are a world away from material production ramps. It's all about natural gas prices and how long they will maintain current levels. Will they be structurally higher for the foreseeable future or not - that's the crux of the thermal coal story.
Thanks for the comment. HNRG owns Sunrise Coal which is operating 1 room and pillar mine. In my opinion, an operator w/ 1 R&P mine cannot compete long term in the Illinois Basin. Reason being that it's competitors are operating in many cases multiple longwall mines (which are much cheaper on a cash cost per ton basis) and which produce an order of magnitude more tons on an annual basis. Also, Sunrise's competitors have the scale to send tons into the export market (which is booming right now), and Sunrise is/does not. Therefore, IF the US thermal market is in some sort of terminal decline (which I've made the argument that structurally higher natgas prices would suggest otherwise) then you don't want to be on the high end of the cost curve in a shrinking market.
That being said... HNRG stock could make for a great short to medium term trade... If I was ARLP or FELP (Foresight Energy, recently out of bankruptcy) I would consider buying Sunrise coal, closing Oaktown, and simply fulling the Sunrise coal supply contracts with those longwalls. Longwalls need volume, so it's a win win.
Therefore, owning HNRG as a potential buyout could be something to consider. But in the long run, operating Oaktown only will eventually get swallowed up by the basins longwall operators.
Thank you for the reply. I have a double on my trade in less than a year and I thought they was a takeover possibility. I believe there is a lot of money to be made in fossil fuels and uranium. We are a long way off before renewable energy is sustainable. I'm going to subscribe to your service.
James, I think if ESG trends continue there will eventually be a carbon tax at the border for certain jurisdictions - like the European Union first and foremost. I think it will actually go much further than that if the anti-fossil fuel crowd gets their way. I'll give you an example.. say an automobile, I think they want to tax the carbon intensity of the entire supply chain that created the automobile. That would therefore incentivize auto manufacturers to use less carbon (swap steel for aluminum, favor copper produced using "greener" methods, etc.
So I think it will go much deeper than simply taxing the coal. And no jurisdiction will be exempt if they want to sell autos into Europe (using the above example). However, since all jurisdictions are unlikely to implement these taxes, those that do will be putting themselves into a competitive disadvantage. Taxing carbon is a tax on growth, so those that tax carbon will therefore grow more slowly. Bottom line.
Hmmm... I recently loaded on some BTU during the pullback. I am wondering if you have a target price to exit the position? Do you use coal price as the indicator? When coal supply starts to ramp up by a lot, and prices cool off, then we sell BTU and other coal equities?
I don't have a target price, instead I will wait and see how much pricing power they have in the Q3 and Q4 earnings calls in order to determine what '22 PRB contract pricing will look like. If '22 contracts are materially better than '21 I expect the stock to re-rate much higher.
I use a bunch of coal indexes as indications of demand. Supply is considerably constrained at the moment, we are a world away from material production ramps. It's all about natural gas prices and how long they will maintain current levels. Will they be structurally higher for the foreseeable future or not - that's the crux of the thermal coal story.
In your cheat sheet comment about Hallador, could you provide a little more information. I own shares. Thank you for the excellent analysis.
Thanks for the comment. HNRG owns Sunrise Coal which is operating 1 room and pillar mine. In my opinion, an operator w/ 1 R&P mine cannot compete long term in the Illinois Basin. Reason being that it's competitors are operating in many cases multiple longwall mines (which are much cheaper on a cash cost per ton basis) and which produce an order of magnitude more tons on an annual basis. Also, Sunrise's competitors have the scale to send tons into the export market (which is booming right now), and Sunrise is/does not. Therefore, IF the US thermal market is in some sort of terminal decline (which I've made the argument that structurally higher natgas prices would suggest otherwise) then you don't want to be on the high end of the cost curve in a shrinking market.
That being said... HNRG stock could make for a great short to medium term trade... If I was ARLP or FELP (Foresight Energy, recently out of bankruptcy) I would consider buying Sunrise coal, closing Oaktown, and simply fulling the Sunrise coal supply contracts with those longwalls. Longwalls need volume, so it's a win win.
Therefore, owning HNRG as a potential buyout could be something to consider. But in the long run, operating Oaktown only will eventually get swallowed up by the basins longwall operators.
Thank you for the reply. I have a double on my trade in less than a year and I thought they was a takeover possibility. I believe there is a lot of money to be made in fossil fuels and uranium. We are a long way off before renewable energy is sustainable. I'm going to subscribe to your service.
Great Blog, thanks for this. Are any Coal pubcos exempt or in jurisdictions safe from the threat of massive carbon taxes and/or future carbon credits?
James, I think if ESG trends continue there will eventually be a carbon tax at the border for certain jurisdictions - like the European Union first and foremost. I think it will actually go much further than that if the anti-fossil fuel crowd gets their way. I'll give you an example.. say an automobile, I think they want to tax the carbon intensity of the entire supply chain that created the automobile. That would therefore incentivize auto manufacturers to use less carbon (swap steel for aluminum, favor copper produced using "greener" methods, etc.
So I think it will go much deeper than simply taxing the coal. And no jurisdiction will be exempt if they want to sell autos into Europe (using the above example). However, since all jurisdictions are unlikely to implement these taxes, those that do will be putting themselves into a competitive disadvantage. Taxing carbon is a tax on growth, so those that tax carbon will therefore grow more slowly. Bottom line.