As far as I know, despite concerns over slowing industrial manufacturing, China will still need coal. In fact, Barron’s ran a piece over the weekend titled “China Still Needs Coal.” The lead began this way: “Booming Chinese demand has lit a fire under Asia-Pacific coal stocks and triggered talk of a lengthy supercycle in the region’s dominant fuel. Everywhere, that is, except in China.”

The author points out that China’s leading coal stocks are all down 25% or more of late.

The worries — as far as the genuine China coal miners go — were not without some basis. China, foolishly, told its miners to keep prices stable. The market read this as a de facto price cap. But that doesn’t affect all of the coal companies…

China consumed 47% of the world’s coal last year. The growth of that demand has been mind-boggling — so much so it is hard to wrap one’s mind around it. I wrote about this recently in Capital & Crisis. In 2000, China consumed as much coal as the U.S. Today, it consumes three times as much as the U.S.

As I wrote in C&C, quoting Richard Heinberg at the Post Carbon Institute:

“China will be pressed to produce the coal it needs domestically. In fact, after being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year’s total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia’s coal exports — and Australia is the world’s largest coal exporter — and growing.

“This means if China imports double again next year — not an unrealistic scenario — China will need to import more coal than Australia can currently provide,” Heinberg notes. “One more doubling of import demand and China will be wanting to import 600 million tons per year, about the total amount of coal exported by all exporting nations last year.”

These are good reasons to get long coal, and I have a few speculative favorites.

One is based in Mozambique. Now, this is not a country one would think to invest in offhand. But Mozambique is home to one of the largest unexplored coal basins in the world. It is a speculative gumbo, because it is still early in the game and Mozambique ain’t exactly Canada.

I’ve been researching the Mozambique story. The Economist had a piece recently about it, which I really enjoyed, called “A Faltering Phoenix.” Here’s how the story kicks off:

“About two hours’ flight north of Maputo, the Mozambican capital, lies the town of Tete on the crocodile-infested banks of the Zambezi River. A narrow suspension bridge forms the only crossing point for the main trade route linking landlocked Zimbabwe, Malawi and Zambia. Until a few years ago, Tete was no more than a dusty down-at-heel stopping point for weary lorry drivers. But now, thanks to massive foreign investment in what may be the world’s biggest unexploited coal field, it is fast becoming a bustling boomtown, already boasting three banks, three car-hire companies, half a dozen decent hotels, an international school and a new airport with twice-a-day flights to Maputo.”

If you are fan of old explorers and adventurers, as I am, you may recall the Zambezi River. Between 1853-56, David Livingstone — of “Dr. Livingstone, I presume” fame — led a majestic journey across Africa following the line of Zambezi River. Author Tim Jean writes, Dr. Livingstone “suffered 27 attacks of malaria and almost died at the halfway stage.”

But I digress. Mozambique has been mostly wrecked by civil war. Infrastructure is bad, but there are railways reopening and bridges going up with the aim of knitting Tete to the port of Beira. Tete, as the above quote makes clear, is a boomtown in the heart of coal country.

Here is a helpful map, courtesy of The Economist:

Mozambique already has a large hydroelectric plant. If you are going to build mines, you need a reliable power source. This is lacking in much of Africa. There is more on the way in Mozambique, thanks to the inflow of foreign investment. There is a scramble now to lock down coal deposits and to make deals. The South Africans are the biggest investors in Mozambique. The Chinese are second.

But don’t forget the “faltering” part of this phoenix. The Economist points to the many problems in Mozambique. Desperate poverty. Corruption. Crime. And international aid is more than half the total state budget. It’s not an easy place to do business.

Anyway, the company I’m looking at has a potentially lucrative coal deposit. The stock has held up pretty well in this storm. I was hoping it would get knocked down. Nonetheless, the other coal miners I have on my radar right now, this is a speculation. As such, it’s not a name that I can release to all 400,000 Penny Sleuth readers without artificially inflating its share price. I’m going to have to keep it reserved for my own readers…

[Ed. Note: If you want to take Chris’ theme and run with it, there are a couple of ways you can go long coal right now – like the PowerShares Global Coal Portfolio ETF (NASDAQ: PKOL) or the Market Vectors Coal ETF (NYSE: KOL). Both of these funds own a basket of coal equities, not the commodity itself.

Still, to take advantage of the speculative potential of Chinese coal right now, you’ll need to invest in something less diversified.]

Sincerely,
Chris Mayer
Penny Sleuth

July 23, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

June 2010 Is the Time to Buy Coal was originally featured in the Penny Sleuth.

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

September 23, 2009

Natural Gas’ Triple Could Give Us a 416% Gain By Year-End was originally featured in the Penny Sleuth.

The American auto industry’s fall from grace coincides with a shift in the public’s perception of personal transportation. Higher gas prices and a new environmentally conscious attitude have pushed gas-electric hybrids and efficient diesels to the top of car buyers’ wish lists — leaving hulking SUVs to rust on the side of the road.

Add in climate change concerns and you have yet another dilemma for automakers. New government standards mandate total fleet averages to meet or exceed 35.5 miles per gallon by 2016. The new measure is part of an attempt by the federal government to limit greenhouse gas emissions.

It won’t be impossible to buy a gas-guzzler after the new fuel-efficiency standards take effect. However, your choices will probably be very limited. It’s doubtful that a struggling automaker will dole out the development costs to bring a nine-seat SUV to market only to have to drag down its required mileage average. So even if you are able to locate the SUV of your dreams seven years from now, it will probably cost much more than you would expect…

While Gas Guzzlers Are Punished, Coal Wins Big

Of course, cars and trucks aren’t the only cause of carbon emissions. Coal, the fuel of choice when it comes to power generation in the U.S., is right near the top of the list. In fact, coal carbon emissions have increased by more than 18% since 1990, while petroleum carbon emissions have increased 10.8% during the same time period.

Despite coal’s impact on the environment, new proposals to curb coal’s carbon footprint appear extremely lenient. So while new mileage laws are set to clamp down on American autos, coal will essentially get a free pass — all thanks to a proposed “cap and trade” system.

Cap and Trade: Government Concessions Guarantee Coal’s Future Success

Proposed legislation addressing carbon emissions isn’t exactly a carbon tax. Instead, the president and his allies in Congress have come up with a cap-and-trade system. Essentially, carbon emitters would have to buy permits that correspond to the amount of carbon dioxide they pump into the atmosphere. If these companies find a way to clean up their act a bit, they could sell some of their permits to more notorious polluters.

The intention of a system like this one is clear. However, there’s no way a proposal with any teeth will ever become law. The Economist reports:

“The system would motivate everyone to reduce emissions in the most cost-effective way. It would raise energy prices, which is the point, but it would also raise hundreds of billions of dollars, most of which Mr. Obama planned to give back to voters. Alas, that plan looks doomed.”

By the time the cap-and-trade proposal was watered down to potentially win enough votes, supporters were left with a bill that offered almost all of the carbon permits for free, with only 15% being auctioned. And the auctioning won’t even kick in for more than two decades.

While stricter mileage requirements will keep automakers in line, coal (and other traditional, dirtier energy sources) will essentially be allowed to thrive unchecked for years to come.

That’s why now is the perfect time to invest in a small-cap coal company. More on that in just a minute…

Coal: America’s Most Plentiful Energy Source

If you live in the United States and your house is on the electrical grid, chances are very high that at least some of the energy used to power your home is courtesy of a coal-fired power plant. In fact, almost half of the energy in the U.S. comes from coal…

It’s undeniable that coal is one of our most precious resources. So why did this seemingly recession-resistant commodity crash and burn last year?

Coal was hit hard by a broader pullback in commodity prices and the recession — which has weakened the demand for steel — whose production relies on higher-grade coal used in fire blast furnaces.

The recent boom in coal prices in 2007–2008 has left the industry nearly crippled today. Because prices were rising so fast, most coal companies kept an open book. They left contracts unsigned, to benefit from what they believed would be continually rising prices.

But when it all came crashing down, coal companies’ stock followed suit. And to make matters worse, most companies did not possess any locked-in contracts to keep business booming during the bad times. Consequently, profits suffered across the industry.

However, one penny stock I’ve been looking at is a small coal miner that possesses some foresight. While every other coal company was leaving contracts open, this miner was closing deals left and right — even during the height of the commodities boom in 2008. It’s a move that appeared foolish at the time. But now this tiny miner is poised to become the “comeback kid” of its sector this year…

If you’re a Penny Stock Fortunes subscriber, you already know the name of this prescient coal play – you got my recommendation to buy its shares early this week.

If not, visit the Penny Stock Fortunes website to learn how my CXS Money-Multiplier System has raked in profitable penny plays in 2009…

Best,
Greg Guenthner

June 17, 2009

How the Death of the SUV Saved American Coal Companies was originally featured in the Penny Sleuth.

This company wants to lead the charge when it comes to liquid fuel conversion. And since I’m a relative novice in the world of gas-to-liquid (GTL) and coal-to-liquid (CTL) technology, I decided this particular company would be perfect to research.

The name of the outfit is Syntroleum Corp. (SYNM: NASDAQ). Syntroleum has developed technology that converts natural gas or coal into synthetic liquid hydrocarbons that are mostly free from contaminants that are commonly found in fuels made from crude oil.

The synthetic liquid fuel can be used by itself in traditional internal combustion diesel engines, which reduces emissions. Or it can be blended with traditional fuels to “upgrade” the fuel to burn cleaner.

And diversifying how the United States gets its energy is not just important now, Syntroleum claims, but it will also become vital in the near future. The U.S. Department of Energy predicts China will face shortages of 5.9 million to 8.8 million barrels of oil a day by 2015. This company realizes the tug-of-war that will ensue over the world’s limited oil supply, and like some of the ethanol and biodiesel companies we’ve looked at before, Syntroleum is looking to provide an alternative solution to crude-based products.

A New Way to Make Fuel

Syntroleum has the money it needs to fund operations for 2006-2007, but it has never built a commercial facility. One of the risks of a commercially-viable GTL plant noted in the company’s annual report is that some of the technology in use at Syntroleum’s testing facilities and other technologies being developed might not prove to be commercially applicable.

In other words, they can make the stuff but they might not be able to do it as efficiently as they’d like on a larger scale. Nevertheless, the company is moving closer to commercializing the product.

Syntroleum is involved in a joint venture with Bluewater Energy Services to develop and pay for the first ever air-based GTL plant that would operate offshore mounted on a barge. A feasibility study commissioned by the two companies expects up to 17,000 barrels of the product produced per day, along with 40,000 barrels of oil, according to Syntroleum’s annual report.

And while the company is still in the red, it has a strong cash supply that should carry it through its research and development stage.

Syntroleum reported revenues of $400,000 for the first quarter of 2006 from joint research development activities with the U.S. government and with licensees and from GTL fuel sales. Its net loss for the quarter was $12.9 million, coming to 23 cents per share — about the same as the net loss of 24 cents per share from the first quarter of 2005.

And with more than $60 million in cash, the company is well positioned to fund its research and development and demonstration plants until its first commercial plant is complete (it spent $6 million on research during the first quarter). Jack Holmes, president and CEO of Syntroleum, said that first quarter costs are in line with the company’s budget as the company focuses on reaching financial close on its first commercial plant by the end of 2007.

Risks and Rewards

With a price tag of $7.75 a share before the market opened this morning — and the company tallying a 77-cent loss per share — it is evident that many investors have faith in this company’s technology and its ability to successfully commercialize its GTL and CTL methods. So a volatile share price is what you’ll get from this $436 million company. Almost $10 separates the stock’s 52-week high of $16.50 with its 52-week low of $6.54. So any bit of good or bad news could greatly affect the share price until Syntroleum starts posting a profit, which would be in almost two years at the earliest once its first facility is operating.

And as was mentioned before, the company is still unsure if some of the technology used in making the synthetic fuels will be as effective in a large-scale environment. If Syntroleum finds it can’t turn much of a profit, it could be a long time before the technology is improved.

Aside from these obvious risks, there are a couple of redeeming qualities that you should check out:

First up is a contract with a behemoth in the oil industry. In 2004, the company signed an agreement with ExxonMobil providing Syntroleum with a worldwide license under ExxonMobil’s GTL patents to produce and sell fuels from natural gas or coal. The agreement also includes all existing ExxonMobil patents in these areas, as well as future patents for the next several years.

Second is the strength of the company’s patents and management. Kenneth Agee founded Syntroleum in 1984 and is still with the company, serving as chief technology officer and chairman. He is credited on many of the company’s patents, as well. In all, Syntroleum has 127 patents issued and pending. Agee obviously sees the potential in this technology and is willing to see it through…

Wasting Natural Gas

GTL technology could help eliminate a lot of unnecessary wasting of natural gas across the globe. Many oil companies burn off unwanted natural gas in order to extract crude. The process is called flaring, and it’s a nuisance and an environmental concern. Natural gas is flared because there is a limited market for it in the warmer climates where it is found and it is difficult to ship overseas to viable markets.

To get a good look at flaring problems in Nigeria, you can check out this National Public Radio write-up.

And Syntroleum has a stake in Nigerian oil as well. The company recently acquired two locations in Nigeria with discovered oil and gas reserves, and also claims to be in the process of buying more. Drilling of the first well will happen sometime around September.

And in November, the company signed two memorandums of understandings that will hopefully allow a GTL plant in Papua New Guinea. Syntroleum is looking to develop about 50,000 barrels per day GTL plant as part of an industrial complex dedicated to gas-based industries near Port Moresby.

Talks with Egyptian Natural Gas Holding through one of Syntroleum’s licensees to construct another GTL plant are also in the works. So, the company continues to seek out opportunities to commercially develop its technology.

There are two main reasons Syntroleum thinks it can succeed better than traditional GTL technology. The first is that its conversion process does not require pure oxygen, making it safer and more cost effective. This in turn helps to contribute to its second advantage: cheaper operating costs, opening the door for smaller plant sizes, including mobile plants that can be mounted on barges.

All of this hopefully ensures that Syntroleum’s commercial plant — which is designed to produce just 17,000 barrels a day — will be economically viable.

Coal

Syntroleum is also exploring ways to commercialize coal to liquid (CTL) technology. The company notes that the largest coal reserves in the world are located in the United States, Russia, India, China and Australia.

However, a lot of the coal in these reserves is expensive to get due to environmental concerns and how far some of the reserves are located from coal markets. And although the company’s CTL program is not as close to commercialization as its GTL technology, it is making progress.

In November 2005, Syntroleum signed an agreement to conduct laboratory-scale demonstration of its catalyst technology with coal. “This program is targeted at advancing early adoption of our proven FT technology in coal-to-liquids,” according to Syntroleum’s website.

And Syntroleum and Sustec AG, a private company based in Switzerland, have an agreement that provides for exclusive joint business development of projects integrating Sustec’s gasification technology with Syntroleum’s technology.

“The joint venture is aimed at converting coal and other carbonaceous materials such as petroleum-coke, residual fuel oil and biomass into ultra-clean fuels. Each company will own 50 percent of the joint venture,” announced Syntroleum. Jack Holmes, president and CEO of Syntroleum said, “We have long considered Sustec as the state-of-the-art leader in gasification technology. We believe this combination can now offer a truly unique and very compelling technology value proposition to the coal industry… Integration of coal gasification and FT technologies is increasingly being sought after in the United States, China, Australia and elsewhere. This joint venture presents a rare opportunity for companies pursuing investments in this important energy industry segment to access the complete technology package required to develop coal energy in an environmentally-friendly way.”

And Syntroleum throws some more convincing stats in the mix: According to a BP world energy review, the world’s 2004 coal reserves were estimated at more than 909,000 million tons. That’s a lot of coal that could be converted to clean fuels.

Analysis

Syntroleum is moving full steam ahead on its GTL projects, and coal shouldn’t be too far behind. It’s still a speculative pick, but the management is dedicated, the technology is in demand, and the price is right.

In its annual report, Syntroleum executives claim that its technologies can be cost effective assuming that oil prices prevail in the $35-$40 per barrel range, so with oil likely to remain much higher, the company should be able to adequately capitalize on its commercial efforts.

If you were to buy the stock between $6 and $8, you would need to buckle up for some price fluctuation for the next year or longer. I don’t think this is the kind of investment that is going to skyrocket in the next few months. However, through all the risks, Syntroleum could become a real player in the alternative fuel world if and when it starts turning a profit.

Other Alternative Energy Technology was originally featured in the Penny Sleuth.