Natural gas rises, coal declines as new energy infrastructure takes shape

By Bryan Livingston
Managing Director and CEO

Peabody Energy’s financial woes embody a trend Capital Alliance Corporation has been following since 2008 — the replacement of coal with natural gas as America’s most important power-generating fuel.

Peabody, the world’s largest privately held coal company, with a history that dates to the 1880s, provides about 10% of the fuel used to generate electricity in the U.S., but has been in decline. On April 13, 2016 the company filed for Chapter 11 bankruptcy protection. While this is unfortunate for the coal sector, it is a consequence of coal’s inability to compete with natural gas for U.S. power generation.

The march toward natural gas

In 2008-2009, we first predicted the power generating economy would begin the march toward natural gas. The U.S. shale revolution has transformed the ability of energy production companies to extract natural gas from shale rock through hydraulic fracturing, or fracking.

As fracking technology has improved and evolved and costs have declined, oil & gas production companies have been able to extract large quantities of natural gas from several vast shale formations in North America.

The end effect is that natural gas surpassed coal generation for the first time in U.S. history last year (on a monthly basis) in April, and did it again from July through October, according to the U.S. Energy Information Administration (EIA).

Going forward, we believe coal will continue to lose market share as abundant, cheap natural gas and environmental regulation create economic disincentives to building coal-fired generating stations.

Coal production in 2015 was approximately 11% lower than in 2014 and at its lowest level since 1986, according to January congressional testimony from the EIA. EIA estimates that at least 14 gigawatts of coal-fired capacity were retired during 2015, equal to nearly 5% of the operable coal capacity existing at the end of 2014.

All new utility-scale capacity of 1 megawatt or greater that was added in 2015 consisted of natural gas, wind and solar units, according to the EIA.

To be sure, there will still be residual coal-generated power around over the next decade, but most coal power generation will be replaced with natural gas.

M&A activity in the energy infrastructure sector

The companies that engineer, plan, construct and commission new and retrofitted natural gas power plants, and the related electrical transmission and distribution infrastructure are among CAC’s clients and prospective clients.

The manufacturing and services value chain that serves the power industry is in a growth mode. Natural gas pipelines and facilities are being built to bring fuel to new gas-powered plants. In parallel, transmission and distribution infrastructure is growing across the U.S. to deliver electricity from new and renovated generating plants to customers.

These companies are major employers and drivers of value for investors. They are part of the 21st century energy delivery infrastructure, and we expect large amounts of capital investment to continue to flow into these companies.