Cues from the commodity markets, more of the same? CASPR relief rally overdone?

Based on recent price movements (1), low hedging levels for 2013 and analyst forecasts, it is likely natural gas prices will be lower for the next few years than they were in 2011.  In comparison, I estimate oil price forecasts are flat to positive and coal price forecasts are negative.

If forward prices and analyst forecasts for 2012 hold true, I believe it will be another bad year for the independent power producers, another good year for liquids MLP’s and another bad year for the coal miners.  On a side-note, I believe the the delay in the implementation of CASPR is temporary and the EPA will succeed in implementing CASPR after some modifications.

In my opinion, it makes sense to remain long regulated utilities and short some coal names.

(1) Jan 2013 contract NG prices have declined approximately 30% over the past year.  Producers have only hedged 13% of their total production for 2013 and are unlikely to do so with 2013 calendar strip prices below $4.  This lack of hedging should translate into lower capital expenditure.

Disclaimer: I am long some regulated utilities.


Time to short Indonesian coal miners?

My favorite short ideas are Adaro (ADRO.JK) and Bumi (BUMI.JK)–Adaro due to the low calorific value of its coal and rich valuation.  And Bumi due high leverage and rich valuation.

Fundamentals for thermal Indonesian coal are weak but Indonesian coal stocks have outperformed the broader markets over the past two months, setting up a short opportunity. Fundamentals are deteriorating due to softening in the major import markets such as China and India and a supply glut at a competitor for coal exports, South Africa. Most important, coal supply is slated to increase in 2012-13 due to post-floods normalization of exports in Australia and Columbia and greater port capacity in Indonesia.

Coal prices in China, the largest importer of thermal coal, are softening due to high inventory levels at the independent power producers and tight credit conditions, which constricts traders.
Coal demand is moderating in India due to the high price of imported coal–please see link to article regarding imported coal sitting at ports despite shortages due to high costs.  Imported coal is >50% more expensive than domestic coal and even blending 10% imported coal can price out these power producers.  Moreover, the recent depreciation of the Rupee versus the Dollar only exacerbates the problem.

Disclaimer: I have no positions in these companies and do not plan to initiate any positions in the next 48 hours.