How Union Pacific Could Benefit From A Potential Revival In The Coal Industry Engineered By The Incoming President
The outcome of the recent U.S. presidential election has raised the possibility of a revival of the domestic coal industry. President-elect Trump has promised to lessen the stringent environmental regulations that have partly been responsible for a decline in the coal mining industry. [1] The demand for coal by utilities has declined over the past few years as a result of the availability of cheap natural gas and an adverse regulatory environment. Weakness in natural gas prices have made it the preferred fuel for thermal power plants, with the share of natural gas in U.S. electricity generation exceeding that of coal in 2016. [2] An adverse regulatory environment for coal has compounded the impact of weak gas prices on the coal industry. President Obama’s Clean Power Plan, which envisages a 32% reduction in power plant carbon dioxide emissions from 2005 levels by 2030, has accelerated the pace of adoption of natural gas as the preferred fuel for electricity generation by utilities. [3] [4] If the new administration revokes the Clean Power Plan and lowers prohibitive environmental regulation on the coal industry, it would certainly boost the prospects of coal mining companies. However, if natural gas prices remain subdued, the increase in demand for coal will remain limited. In this article, we will look at how this scenario would impact Union Pacific.
Impact Of A Revival In The Coal Industry
We currently forecast U.S. railroad shipments of coal to decline from around 3.85 million carloads in 2016 to 3.44 million carloads by the end of our forecast period. If the incoming administration follows through on its promises to create a more conducive regulatory environment for coal mining, it would necessitate a revision of our U.S. rail coal shipments forecast. However, unless natural gas prices increase appreciably from current levels, coal demand is unlikely to increase significantly from current levels. The EIA expects natural gas prices to increase to $3.12 per MMBtu in 2017, from an estimated $2.50 per MMBtu in 2016. [5] If the rising trend in natural gas prices persists beyond 2017, with the right regulatory environment, the attractiveness of coal as a fuel for electricity generation vis-a-vis natural gas could increase substantially. In order to model this scenario, we have factored in a 5% increase in U.S. railroad coal shipments by the end of the forecast period, as opposed to the 10% decline currently factored into our forecast for the same.
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Check out our forecast for U.S. Rail Coal Shipments in this scenario
We have also suitably modified our forecasts for Union Pacific’s revenue per carload for coal shipments and the company-wide EBITDA margin, reflecting the improved demand conditions for coal.
See our complete analysis for this scenario here
The modifications to our various forecasts translate into a 10% increase in our price estimate for Union Pacific. Thus, the company could benefit if the incoming administration follows through on its promises to revive the U.S. coal industry.
Have more questions about Union Pacific? See the links below.
- What Is Union Pacific’s Revenue And EBITDA Breakdown?
- What Is Union Pacific’s Fundamental Value Based On 2015 Results?
- By What Percentage Did Union Pacific’s Revenue & EBITDA Grow In The Last 5 Years?
- By What Percentage Can Union Pacific’s Revenue & EBITDA Grow In The Next 3 Years?
- How Has Union Pacific’s Revenue Composition Changed Over The Last 5 Years?
- How Will Union Pacific’s Revenue Composition Change By 2020?
- What Would Be The Impact Of A 100 Basis Points Decline In Union Pacific’s Share Of U.S. Rail Intermodal Shipments?
- Union Pacific Corporation: A Look Back At The Year 2015
Notes:
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Notes:
- Oil, Coal Seen as Winners With Donald Trump Victory, Wall Street Journal [↩]
- Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016, EIA Website [↩]
- FACT SHEET: Clean Power Plan By The Numbers, EPA Website [↩]
- Cheap Gas Tests Trump’s Promise to Revive Coal, Wall Street Journal [↩]
- Short Range Energy Outlook, EIA [↩]