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Why Coal Firms Face a Bleak Future

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Top hedge funds exhibit mixed trends in Consol Energy

The graph below clearly shows that while Wellington Management Group has steadily reduced its holdings in Consol Energy (CNX), the same isn’t true for the likes of RR Partners and Dimensional Fund Advisors. These two firms have increased their stakes in CNX over the past year. Meanwhile, given the weak outlook for coal, the consensus on such firms is generally bearish.

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Consol Energy sheds workforce amid slumps in coal and gas

Consol Energy announced a 10% cut to its workforce as a result of slumping fuel prices. The company recently completed an IPO (initial public offering) for an MLP (master limited partnership) for the firm’s coal business. However, the offering received a lukewarm welcome from investors, whose attitude toward coal seems to be rather negative given the present circumstances.

Why is the outlook bleak for coal firms?

Coal contributes close to 40% of carbon emissions globally. Financial institutions are increasingly unwilling to fund coal projects for the future. That, coupled with the fact that renewable electricity costs have come down, means coal-based electricity faces stiff competition from alternative sources such as natural gas.

Chesapeake Energy (CHK), Anadarko (APC), and Devon Energy (DVN) are among the top natural gas producers, with ~6% exposure to the Energy Select Sector SPDR Fund (XLE).

Not surprisingly, US coal firms have fared poorly during the bull market over the past five years. Moody’s has labeled most publicly traded debt belonging to coal firms as “junk.” So clearly, investments in coal are far from a good bet.

According to estimates from the U.S. Chamber of Commerce, coal is expected to contribute less than 15% toward electricity generation in the US by 2030, down from 40% in 2013. And while renewable energy keeps getting cheaper, carbon taxes continue to be imposed in Europe, California, China, and Canada. Coal fees are imposed in India to increase the attractiveness of renewables. All of these trends paint a bleak picture for firms engaged mainly in coal mining.

In the next part of this series, we’ll briefly discuss some technical indicators that can help gauge the momentum of trades in select energy stocks.

Correction: This post originally described Dimensional Fund Advisors as a hedge fund. However, Dimensional Fund Advisors is an investment firm with a primary product in mutual funds. We have since updated the post. We regret this error.

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