I can't quit you coal

why coal and natural gas are not going away any time soon

Since 2008, there has been a big push to generate energy that is considered “renewable”. New companies sprang up overnight to take advantage of government handouts to create solar panels and wind turbines. The new “green” economy of renewable power generation came to life. This transition and distribution of government money was not without a few scandals. It has now been 13 years since the transition and it is obvious that coal’s reign as supreme energy generator is over.

The other thing that is obvious is that renewable sources only replaced a small fraction of coal’s energy production. The majority of the decline in coal was picked up by natural gas.

Recently, giants in the investing world have found a new money maker, ESG investing. ESG stands environmental, social, and (corporate) governance. Its the idea that companies should be evaluated on criteria other than their balance sheet, P&L statement, cash flow, and earnings. ESG is primarily concerned with; how the company treats the environment, if there is ample diversity in their employee base and communities where it operates, and if there is ample diversity on their board or company leadership.

Blackrock, the world’s largest asset manager with over $9 trillon in assets under management, has fully embraced the ESG idea. They’ve created a group of ETF products that charge high rates to feel good about your investment decisions. On the heels of this development, they’ve also sponsored Engine No. 1’s move onto the board at Exxon (XOM). Engine No. 1 is a small ESG activist hedge fund who wants Exxon to reduce its carbon footprint. Exxon executives and shareholders argued that Engine No. 1 wasn’t qualified to run the oil company but with Blackrock’s backing, they got a seat at the table.

Blackrock holds a lot of sway in the investment landscape and their CEO, Larry Fink, uses this sway like a bludgeon to get what he wants. His latest effort is an attempt to defund investment into oil, coal, and natural gas companies. He has made it a goal of Blackrock to cut investments into these companies because of their carbon emissions.

When investor money begins to dry up, these companies will do two things. First, they will sell-off or shutdown their least productive assets. Secondly, they’ll stop investing in new projects. Over time, these two forces create shortages which begin to drive up prices. We are already starting to see this play out in the uranium market.

This idea has been around for as long as people have traded stocks. In fact, Benjamin Graham spelled it out plainly in his classic book, “The Intelligent Investor”. He suggested targeting companies that other investors shun. So when the largest investment manager in the world says they are going to shun oil, coal, and natural gas, I want to find ways to capitalize on that.

The other factor that is playing a roll in this drama is renewable energy sources. Texas is now a case study in renewable power generation when the grid is under duress. When there was an arctic blast that pushed down into Texas earlier this year, wind turbines froze and solar panels under-performed. This pushed energy prices in Texas through the roof. Then during the summer, the opposite played out. There was a heatwave that pushed into Texas. The renewable power generation sources weren’t enough to keep the air conditioners on and energy prices again exploded.

No one wants a repeat of this scenario, so fossil fuel power plants are coming back online. Earlier this year, Texas opened up a new power station that is made up of two units which burn natural gas and generate 993 megawatts of power. This plant is operated by Entergy Corp (ETR) who has several throughout the southeast. I see this playing out across the US and Europe. Renewables are great when times are good, but when the grid is under duress, old and reliable beats new and unreliable every time. This will put the squeeze on prices of natural gas and coal.

A future factor to keep in mind is electric cars. The government’s constant meddling in the auto industry has been focused on raising miles per gallon standards. Now the feds want to mandate electric vehicles. The problem that is unseen is the amount of electricity that will be needed to charge these vehicles.

When more people begin to adopt electric vehicles, electricity demand is going to rise and renewable sources will be slow to adapt. This will further put the squeeze on reliable sources of energy production. Early investors have already started to move into position. David over at Live Better Now highlighted some of the top picks in the coal field and provided profiled looks at both CONSOL Energy (CEIX) and Ramaco Resources (METC) (I have a position in CEIX).

On the natural gas side, I’m holding Whiting Petroleum (WLL) and I’m keeping an eye on Oasis Petroleum (OAS), who recently came out of bankruptcy. These are smaller market capitalization companies whose stock will be more volatile when reacting to price changes. For larger and less volatile companies I like; EOG, Cabot (COG), and Continental (CLR).

This list is nowhere near exhaustive so do your own research to see which companies work best for your investment situation. Some of these oil & gas companies offer dividends. Here’s a quick take from Fidelity’s stock screener: