When we asked some of our contributors to talk about the future of energy, it wasn't a surprise when wind turbine manufacturer Vestas Wind Systems (NASDAQOTH:VWDRY) came up. But we sure weren't expecting them to write about coal producer Alliance Resource Partners (NASDAQ:ARLP) or natural gas and oil producer Chesapeake Energy (NYSE:CHK). But they did, and for good reason.
These surprisingly bold bets are a reminder that fossil fuels are likely to remain a meaningful source of global energy for years to come, even as renewables like solar and wind continue to grow every year. Keep reading to learn why these three companies could make excellent investments in the future of energy.
Still life in coal
Reuben Gregg Brewer: There's a famous skit from a Monty Python movie in which a man brought out to be collected after his "death" wakes up and says, "I'm not dead yet." That sounds a lot like the thermal coal industry, which is struggling mightily as alternative power sources gain traction. But it is, in fact, far from dead. That said, you need to back the right horse, because the problems the industry is facing are very real. The best investment option looks like Alliance Resource Partners.
For starters, Alliance operates predominantly in the Illinois Basin (ILB), one of the most desirable coal regions in the United States. In fact, according to the U.S. Energy Information Administration, the ILB is the only coal basin expected to see modest increased demand in its baseline estimates out through 2040. There will be robust growth, however, if currently proposed power regulations aren't implemented. In fact, over the next 15 years or so, coal is expected to supply at least 20% of U.S. power in the absolute worst-case scenario envisioned by the EIA.
So, despite what it may seem like, coal clearly isn't dead, and Alliance operates in a good coal region. But there's also the not-so-subtle fact that Alliance has managed to turn a profit throughout the coal industry's downturn. Peers like Peabody Energy, Arch Coal, and Alpha Natural Resources were all forced into bankruptcy court. That's a big statement to Alliance's staying power, backed up by a conservative approach to the business. For example, after a distribution cut, the company expects to cover its distribution by two times this year -- a huge amount of coverage in the limited partnership space.
Meanwhile, long-term debt was just 20% of its capital structure at the midpoint of the year, with interest expense accounting for only about 1.8% of revenues. In other words, Alliance is in pretty solid financial shape. And while that distribution cut hurt, it will help ensure the partnership survives the downturn in stride so it can benefit from its solid position in one of the most desirable coal regions in the country. If you are willing to take a contrarian look at the future of power, Alliance Resource Partners' roughly 8% distribution yield might be worth a deep dive.
Better built for future headwinds
Jason Hall: Investing in Vestas Wind Systems (the lone renewable player in this article) is as much counting on the company avoiding its cyclical struggles going forward as a bet on growth in wind energy production. While the industry has continued to grow -- and will keep growing for many years to come -- it has historically been very cyclical. These ups and downs have been a big problem for Vestas' profits in the past.
For the compete article please visit
Motley Fool
ABOUT
Dynamic Wealth Research was founded on the principle the world is changing at an ever-increasing pace. The greatest profit opportunities an investor will ever find are from massive, sweeping changes. Dynamic Wealth Research analyzes and closely follows these changes, keeps its readers on the leading edge of them, and shows you how to be best positioned these anxious, interesting, and ultimately profitable times.
