The surging electricity demand from AI data centers could unexpectedly revive coal as a primary energy source, despite past efforts to phase it out. Boiler manufacturer Babcock & Wilcox is positioned to benefit from this, alongside natural gas plant construction. This potential shift is strongly influenced by the current presidential administration’s pro-coal stance, which views coal as a national security asset, though it faces environmental opposition and regulatory challenges.
A surprising energy source could be making a comeback: coal. This was the key takeaway from an interview with Kenny Young, CEO of Babcock & Wilcox, a long-standing boiler manufacturer now specializing in engineering and construction. Young highlighted the explosive demand for power driven by the data center boom, a topic of mutual interest.
Babcock & Wilcox boasts a substantial $2.7 billion backlog, with $2.4 billion tied to a significant deal with Base Electron, backed by Applied Digital. Applied Digital is a company focused on designing digital infrastructure for high-performance computing. This entire data center narrative is far more expansive than commonly perceived, often constrained by a negative bias predicting a bust akin to the dot-com crash. This bias, the author argues, has caused investors to miss out on significant gains, such as Babcock & Wilcox's stock, which has surged 244% this year after trading below $1 a year ago.
While acknowledging his late entry into this investment theme, the author notes that many companies, including Micron, Intel, and Sandisk, continue to offer opportunities. The article emphasizes that the energy demands are so immense that coal, once largely abandoned, is poised for a major revival. This is particularly true if the current administration, under President Donald Trump, and the Department of Energy prevent coal-based or coal-using companies from ceasing operations. Coal, though considered a "dirty fuel," comprised 50% of U.S. power in 2007 and now stands at 15-17% of the grid. Despite a 40% reduction from 2010, it still generates 173-190 gigawatts (GW). With projections indicating a need for 90-100 GWs of new energy if data center construction continues apace, the idea of sustaining or reviving coal plants is not far-fetched. The president views coal as a critical resource and a domestic national security asset, overriding environmental concerns that have shaped energy policy for generations.
Focusing back on Babcock & Wilcox, the company recently completed a successful offering of 10.8 million shares at $18.50, primarily to strengthen its balance sheet and fund a major expansion. This deal was considered a success, despite being handled by B. Riley, a brokerage house currently under SEC investigation. The author discloses this relationship due to short-selling firm Wolfpack Research's claims that the $2.4 billion contract with Applied Digital-backed Base Electron was used to inflate B&W's stock, given B. Riley's substantial stake in the company. The author explains this not to discredit B&W's technological capabilities but to clarify that the company likely would not have raised capital so easily without the Base Electron contract, and the future of Applied Digital's plans remains uncertain, as both companies have been unprofitable.
Applied Digital, despite losing money, saw its valuation soar from $1.5 billion a year ago to $12 billion today. A significant 32% of its shares are sold short, attributed either to general skepticism towards data center stories or concerns regarding its connection with B. Riley. Applied Digital's legitimacy is further bolstered by its relationship with CoreWeave, which constitutes the majority of its $16 billion backlog, and a 15-year lease with an unnamed hyperscaler.
Another advantage for Babcock & Wilcox is its in-house capability for constructing natural gas power plants. Currently, GE Vernova is the primary builder of such plants but is fully booked and cannot take on more projects. This presents a significant opportunity for B&W to become a key player in natural gas plant construction, as it assures ample capacity.
The author cautions that these insights are already known to both B&W enthusiasts and short sellers, advising potential investors to be aware of the controversies, including the B. Riley connection and Applied Digital's reliance on CoreWeave. While the "easy money" from the initial surge might be gone, the long-term potential, especially regarding coal, could still be significant.
B&W's strong involvement in building and maintaining coal plants worldwide positions it uniquely for a coal resurgence. Despite the global trend of phasing out coal, the current administration, under President Trump, is actively working to keep coal plants operational. His executive order, "Reinvigorating America's Beautiful Clean Coal Industry," aims to counteract decades of efforts to reduce coal use due to pollution. Energy Secretary Chris Wright is leveraging executive authority to prevent coal plant closures, citing data center demand and the need for baseload and backup power for renewables. While coal is widely considered inefficient, dirty, and expensive, it has powerful backing from entities like the National Coal Council, headed by Peabody Energy CEO Jim Grech. This council advocates for coal's role in national security and the data center revolution, directly benefiting companies like Peabody Energy, Core Natural Resources, and Alliance Resource Partners.
The author notes the potential for these coal-related stocks if Wright's efforts withstand court challenges. Peabody, with its CEO's dual role, appears particularly well-positioned and undervalued. Core Natural offers export potential via its Baltimore terminal, and Alliance provides a substantial dividend yield. Investing in coal, however, requires a strong belief in continued pro-coal policies, potentially through future administrations, given the utilities' historical reluctance to invest further in coal due to regulatory uncertainty. The national security aspect of data centers, however, lends new relevance to coal.
Ultimately, the data center story's far-reaching implications touch numerous industries, especially the utilities sector, which thrives on growth and ratepayer expansion. Despite recent downturns due to rising interest rates, utilities like Sempra, Southern, and American Electric Power are highlighted as potential turnarounds. The continuous demand from data centers creates diverse investment avenues, with coal and natural gas emerging as key paths to prosperity. Other companies mentioned include Eaton, GE Vernova, Vertiv, and Caterpillar. The author concludes by weighing speculative options like B&W, dividend plays like Alliance Resources, or value-growth picks like Peabody and Core Natural, contrasting them with established tech giants like Nvidia.
