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April 01, 2007 at 04:00 AM
Some analysts predict that supply and demand changes in 2007 could work in favor of the coal sector,
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Mark L. Reichman
A.G. Edwards
314-955-6557
Area of Coverage: Coal
Outlook: We view 2007 as a transition year to a potentially more balanced supply/demand picture and expect the coal sector’s outlook to improve modestly. An expected decline in 2007 coal production in concert with higher demand for coal could result in a tighter supply/demand balance by year-end that would be supportive of coal prices.
We believe the long-term outlook for the coal sector is supported by the following factors: growth in demand for base-load sources of electricity; new coal-fired power plants under construction; coal’s cost advantage relative to other fuel sources such as natural gas; alternative uses of coal such as coal gasification; and the fact that focus on clean coal technologies spurs greater usage.
The North American Electric Reliability Council recently warned that investment in incremental base load electric generating capacity is sorely needed to keep up with the expected growth in long-term power demand. Therefore, anticipated demand will be satisfied by increased utilization of existing power plants and the addition of new capacity. While we would not expect them all to get built, the Department of Energy’s National Energy Technology Laboratory has identified 159 new and proposed coal-fired plants that could add up to 96 gigawatts of capacity by 2020.
Buy-rated: Alliance Holdings GP L.P. (AHGP), Natural Resource Partners L.P. (NRP), Penn Virginia GP Holdings L.P. (PVG) and Penn Virginia Resource Partners, L.P. (PVR) .
Why the upgrade of Natural Resource Partners? NRP issued 2007 guidance that was generally favorable in our opinion and included recent acquisitions. As a result we have increased our 2007 and 2008 DCF per unit estimates to $4.66 and $5.22 from $4.21 and $4.44, respectively. We have raised our estimated five-year distribution CAGR to 12 percent from 10 percent and increased our 2007 and 2008 distribution per unit estimates to $3.74 and $4.16 from $3.72 and $4.04, respectively.
