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As U.S. natural gas producers concentrate on more profitable oil production and reduce gas drilling, natural gas prices are ticking up. And because of the hot summer, utilities’ coal demand will pick up as coal becomes the cheaper power-generation fuel, benefitting the Class Is, according to a report released yesterday by Seeking Alpha that was authored by Qineqt, a team of investment professionals.

Natural gas prices have been rising due to a drop in supply and a rise in power demand. The natural gas rig count has dropped by four to 518 and a hotter-than-usual summer has led to a rising demand for air conditioning, the report states. Higher natural gas prices might continue into winter if the weather is colder than usual and power demand for heating increases, Qineqt officials said.

CSX Corp. has the largest exposure to coal among the Class Is: Coal accounted for 31 percent of its total revenue in the first quarter and 27 percent in the second quarter. Profitability was depressed in both quarters due to utility coal headwinds, the report states.

But CSX will benefit the most from rising natural gas prices as utilities start burning more coal to generate electricity in the warm summer, Qineqt officials said. With rising gas prices, the railroad might end up generating more profits than it expects for the year’s second half, they said.

CSX’s price/earnings to growth (PEG) ratio is the lowest and most favorable among the Class Is at 0.83, the report states. Norfolk Southern Railway's PEG is 0.85, Union Pacific Railroad's is 1.13 and Kansas City Southern's is 1.22. CSX appears to be underpriced compared to its growth opportunities, Qineqt officials believe.

Even if coal carloads continue to decline in the second half, CSX anticipates opportunities in transporting frac sand, crude oil and petrochemicals, they said.

Coal volumes have stabilized early in the second half after bottoming out in the second quarter, but headwinds will persist in the third quarter as utility stockpiles remain above average levels, Robert W. Baird & Co. Inc. analysts said in their July “Domestic Truck, Intermodal and Rail Trends” report. Coal producers expressed guarded outlooks while reporting their 2Q financial results, they added.