Coal mining is as American as warm apple pie. The United States was built on the backs of coal miners who helped carry this great country through hard times and made it the true and proud nation that it is today.
But coal mining has soured in recent memory here in the states, especially as the U.S. energy mix has turned its back on coal. Even as worldwide demand increases – it’s still the number one source of energy for the generation of electricity worldwide – producers here are changing their strategies.
With the Obama administration hell bent on turning Americans on to cleaner energy, coal producers have had to face a barrage of regulations set against coal production. This has only made the industry throw up its arms and become unpopular on Wall Street.
And things aren’t going to get any better. The U.S. is in the midst of a shale gas revolution that is taking the entire county by storm and shows no signs of letting up. Ramped up shale production has slashed the price of natural gas, prompting U.S. power plants to burn less coal and sending demand right down with it.
Coal mining has always been a dirty job, but now it’s becoming a dirty word. Even in China, where much of the U.S.'s coal exports are sent, there is a glut of steel, tarnishing the demand for metallurgical coal (used to make steel).
Last month, the Obama administration announced new regulations that will strictly enforce the amount of carbon pollution a U.S. power plant can generate. As if things weren’t bad enough with natural gas taking over, the coal industry now is forced to fight these new standards, saying it is impossible to build coal plants without using carbon emission-capturing technology – technology that is yet unproven and costly.
States like West Virginia, which rests its laurels on the coal mining industry, are going to change, too. They don’t have much choice.
But change just might be the best thing going forward. West Virginia, the state that helped pioneer the coal mining industry and build the very foundation of the America we know today, didn’t reap the rewards it gave to everyone else.
In fact, for more than 100 years, coal has been king of West Virginia, and it has become one of the poorest states, according to NationalJournal. The median household income is just under $40,000 – $13,000 less than the national average, $20,000 less than neighboring Virginia, and more than $30,000 less than in Maryland.
The good news: West Virginia has a second chance as natural gas development is exploding in the state.
Consol Energy (NYSE: CNX) announced it will sell five West Virginia coal mines to privately held Murray Energy Corp. to focus on building its natural gas operations.
The reason: too much uncertainty, especially as new regulations are put in place. Advisers to Consol on the deal were Stifel (NYSE: SF) and Bank of America (NYSE: BAC).
The five mines are steeped in history and are some of Consol's oldest and most expensive operations.
Consol, founded during the Civil War, will rid itself of half of its total coal production for $850 million in cash and $184 million in future royalty payments for its coal reserves, according to Reuters. Murray will also assume $2.4 billion of Consol’s liabilities.
The future for Consol will be that of a gas exploration and production company with a coal subsidiary.
The company mostly sells thermal coal (used for electricity), but it also produces metallurgical coal, which, as I mentioned earlier, is seeing sputtering demand from buyers like China.
Consol will retain coal mines in Pennsylvania and Virginia and will put money from its new sale towards natural gas development.
It already has large holdings in the Marcellus and Utica shale fields in Pennsylvania and Ohio, and it is currently drilling underneath the Pittsburgh International Airport, of all places.
The deal is expected to close by year end.
What we have to focus on now is natural gas – a cleaner, more cost effective alternative to coal. It will make the U.S. stronger than ever before and revitalize hard working states like West Virginia, which fortunately will be given a second chance, and which need it more than most.
Fracking technology and horizontal drilling methods have unearthed the resource and will be employed heavily in shale formations to expose the riches.
While the coal mining industry was fading anyway, West Virginia alone was able to produce nearly 400 million cubic feet of gas in 2011 – the latest year available for federal data, according to NationalJournal, and an increase of 50 percent over 2010. That’s more than twice what the state was producing a decade ago.
Consol plans to reduce its annual dividend by half to 25 cents at the close of its latest deal, which isn't sitting well with investors.
But 2014 seems promising, as the company expects to produce more than 200 billion cubic feet of natural gas and increase production by 30 percent each year thereafter, according to Reuters.
As for coal mining, it’s extremely volatile here in the U.S., especially as it continues to take heat from Washington, where new rules shun the industry with every step.
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