Coal might be poised for a resurgence. This was a key takeaway from my conversation with Kenny Young, the CEO of Babcock & Wilcox (B&W), a boiler manufacturer with a history spanning 160 years and a shift towards engineering and construction services. Young highlighted the rising energy demands fueled by an explosion in data center development—a topic that piqued my interest. Currently, B&W boasts a backlog of $2.7 billion, with $2.4 billion tied up in a partnership with Base Electron, a firm associated with Applied Digital, which specializes in creating infrastructure for advanced computing.
I felt compelled to discuss this encounter for several reasons. Firstly, the narrative surrounding data centers is broader and more impactful than many might assume. There's a lingering skepticism that recalls the dot-com crash, leading to hesitancy in making investments that could yield considerable returns. Babcock & Wilcox's stock has surged 244% this year, jumping from under $1 one year prior to its current price of $21. Secondly, while I might be perceived as late to the trend, this hasn't hindered many established companies—like Micron, Intel, and Sandisk—from performing exceptionally well. Others might question the timing, yet the data center growth remains undeniable.
Thirdly, the accelerating energy needs imply that coal, once dismissed, could stage a comeback if energy utilities resist interventions from the government aimed at phasing it out. Historically, coal provided half of the U.S. electricity in 2007, but its share has dwindled to 15-17% of the energy grid today. Although coal use has dropped by 40% since 2010, it still generates 173-190 gigawatts (GW). This poses the question: how do we accommodate an estimated additional 90-100 GWs if the expansion of data centers continues at this rate? The revival of coal, or at least the retention of existing coal plants, isn’t an outlandish notion.
Coal's environmental implications have been debated for decades, but current political sentiments favor coal as a vital domestic energy source. Returning to Babcock & Wilcox, the company recently executed an offering of 10.8 million shares at $18.50 primarily to strengthen its balance sheet ahead of a significant expansion. The stock price had recently been $21.22, concluding the day at $21.85, indicating a successful transaction despite concerns raised about their relationship with B. Riley, a brokerage under scrutiny by the SEC.
Critics, including Wolfpack Research, have highlighted potential conflicts involving Applied Digital’s CEO, who previously held a leadership role at B. Riley Asset Management. The skepticism stems from the substantial contract between B&W and Base Electron, raising questions about stock manipulation. Nonetheless, B&W appears well-equipped technologically to construct power plants.
While the partnership with Base Electron is crucial for B&W's recent success, there’s uncertainty regarding the commercial viability of Applied Digital, as the company has been incurring losses and its market value has skyrocketed from $1.5 billion to $12 billion in one year. A concerning 32% of Applied Digital's stock is sold short, potentially due to legitimate doubts about its business model or the implications of being tied to B. Riley.
In addition to its coal-related interests, B&W has capabilities in constructing natural gas plants. General Electric's Vernova is currently the leading developer in this renewable sector but has indicated that its capacity to take on new projects is limited. This presents an opportunity for B&W to step in as a secondary provider for natural gas plants, promising a bright future for the firm.
Investors in B&W should remain aware of its mixed narrative, particularly in light of the controversies surrounding its partnerships, even while recognizing its proficiency in building coal-fired facilities, especially amid shifting U.S. energy policies favoring coal. With the backing of figures like Energy Secretary Chris Wright, who is actively preventing coal plant closures citing demand from the data center sector, the role of coal could become increasingly significant once more as the administration promotes this energy source as part of a resilient energy strategy.
However, while there are promising developments for coal, uncertainties loom. Legal battles could complicate Wright’s proposals, but if successful, companies like Peabody Energy, Core Natural Resources, and Alliance Resource Partners could emerge as substantial beneficiaries. Peabody stands out, trading inexpensively with considerable upside potential, especially since its CEO leads the National Coal Council, which advocates for coal as a national security imperative linked to the data center rise.
Investors need to gauge the sustainability of coal’s resurgence and potential political shifts as they consider their investments. Companies like Alliance Resource, with strong dividend yields, might appeal to those wary of coal's volatility but seeking stable returns. Ultimately, the data center expansion extends beyond just energy needs and could create vast opportunities throughout the utility landscape, making it a focal point for investors keen on emerging trends and sectors, including renewable energy alternatives like natural gas and other innovations in energy production technology.
