AI's insatiable appetite for electricity could revive a forsaken energy source
C
CNBC Finance
11 min read
Coal could come back. That was my insight, or more, my instinct, after interviewing Kenny Young, the CEO and seven-year veteran of Babcock & Wilcox , the 160-year-old boiler manufacturer turned engineering and construction company. Young wanted to talk about the surging demand for power spurred by the data center boom. So did I. B & W has a $2.7 billion backlog, $2.4 billion of which is a deal with Base Electron, backed by Applied Digital , a company purpose-built to design digital infrastructure for high-performance computing. I want to write about this "Mad Money" encounter for a few reasons. First, to show you that the data center story is so much bigger than we imagine. Our thinking is constrained by a particular negative bias that says it all has to end, like the dot-com crash of the early aughts. That bias has kept people from making easy money, like the money you would have made by buying Babcock & Wilcox stock, which is up 244% this year alone. This $21 stock traded below $1 one year ago. Second, I am no groundbreaker here: obviously, I'm late to the party. But that has somehow meant nothing to so many of these companies â witness Micron , Intel , Sandisk â that I must acknowledge my timing. Some of you might consider it late, late, late, as I wrote about last week . Others argue, 'So what, it's the data center.'" Third, I want to point out that the power demands are so great that the once-forsaken energy source of coal is going to come back in a big way if the utilities don't stop President Donald Trump and the Department of Energy from forcing coal-based or coal-using companies to continue using it. The dirty fuel â at least relatively if not absolutely â accounted for 50% of U.S. power in 2007 and is now down to 15-17% of the grid's energy source. Even though it is down 40% from 2010, it still powers 173-190 gigawatts (GW). We may need 90-100 GWs of new energy if the data center buildout continues at this pace, so the idea of reviving coal, or at least not letting coal plants close, is hardly fanciful. I write that because while the environmental toll of coal has been obvious for generations, the president regards coal as a major resource and domestic national security weapon. Which brings me back to Babcock & Wilcox. Last Friday, B & W placed an offering of 10.8 million shares at $18.50, mostly to shore up its balance sheet and prepare for a major expansion. The stock had gone out at $21.22 the day before and finished trading at $21.85. So you could call the deal wildly successful, even as it was handled by B. Riley, a brokerage house under investigation by the Securities and Exchange Commission. I am disclosing this relationship because Wolfpack Research, a short-selling firm, has cited it as a negative for Applied Digital and, by extension, for B & W. What's considered wrong here? Mainly, Wes Cummings, CEO of Applied Digital, also served as the president of B. Riley Asset Management until February 2024. Short sellers have claimed that the $2.4 billion contract with Applied-backed Base Electron was used to pump up B & W's stock. B. Riley holds a substantial stake in B & W, so the increase in backlog was meaningful. I don't think it could have done that secondary all the way up here without it. I go into all of this not to discredit B & W, because it clearly has the technology needed to build plants, but because I don't want anyone to think that B & W has huge multiple-power contracts. The company would most likely not have raised the money so easily without the Base Electron contract, and we have no real assurance that Applied Digital will go through with its plans. Like many companies in this arena, Applied Digital loses significant money. So does B & W. Applied Digital was worth $1.5 billion a year ago. It is now worth $12 billion. Late, late, late. Importantly, 32% of Applied Digital's outstanding shares are sold short. That could be the usual skepticism and bias against so many of these data center "stories." Or it might be the tenuous relationship with the tarnished B. Riley. Applied Digital has a relationship with CoreWeave , which accounts for the bulk of Applied Digital's $16 billion backlog. It has another 15-year lease with an unnamed hyperscaler. That's enough to make Applied Digital "real" and therefore validate B & W's stock price increase. Another positive for B & W: it has its own proprietary capability for building natural gas power plants. Right now, GE Vernova , which the trust owns, is the principal builder of natural gas-fired plants. But GE Vernova has made a point of telling me that it is sold out near term and can't add more plants than it has now. In fact, that's the principal rap against GE Vernova. It's out of capacity. That makes B & W a good secondary call on natural gas plants, and the company assured me that it is not limited and has the capacity to build more. That could be a terrific part of the B & W story. Remember, however, that I am not a groundbreaker. All that I have told you is known to both B & W aficionados and vocal short sellers. So, if you buy B & W stock, you have to do so knowing about the controversy surrounding the company, despite its ties to the totally legit but heavily indebted CoreWeave. Perhaps, given the secondary and the B. Riley overhang, the easy money has been made here. But perhaps for another reason â coal â it hasn't. Which is what got me most excited about this story: B & W's exposure to coal. While this giant Base Electron-Applied Digital contract for 1.2 gigawatts is right in the wheelhouse of the natural-gas-powering data center story, B & W is basically a coal play. B & W has a hand in building and maintaining coal plants worldwide. It's the best at what it does. Except that what it does is being phased out worldwide, especially here, where the country â including electric utilities themselves â has tried mightily to wean itself off coal. Until 2025, when President Trump came to office. Trump's a huge believer in coal. A year ago, he signed an executive order called "Reinvigorating America's Beautiful Clean Coal Industry." For one moment, forget the Orwellian nature of the order, No. 14241, and accept that we have a lot of coal plants that would otherwise be closing after several decades of executive orders and agency prosecutions against coal because of the inherent pollution it causes. It is true, though, that these plants are vital to the baseload of many utilities around the country. They are also integral to providing back-up power to the 26% of our grid that is powered by renewables. Because it is not always windy or sunny, coal is very important to these utilities. Utilities built a large number of coal plants as a result of the 1970s oil embargoes. President Jimmy Carter, stung by that generation's problems with the Gulf producers, hailed us as the Saudi Arabia of coal and pressured utilities to build coal plants, hence the 50% of the grid that was coal. But coal plants have a 40- year useful life. B & W's business includes building and servicing, but the former pretty much went out of style when the plants did, and the radical phase-out of coal as a power source crushed the company. But now the president and Energy Secretary Chris Wright are working hard to keep coal alive as part of a robust grid. Wright is using his executive authority to block the closing of coal plants. He has used his emergency power to stop the closure of coal plants in Michigan, Indiana, Colorado, and Washington. He cites demand from data centers as the chief reason. Plus, the president has repeatedly stated that he favors coal and is against renewables. He's slashed programs and loans needed to phase out coal. He's basically the anti-Biden on the issue. Coal is inefficient. It's dirty. It's thought to be the all-around worst form of energy in terms of any parameter, especially expense. But it's got powerful backing, including that of the National Coal Council, a federal advisory committee that is headed by Jim Grech, who also happens to be the CEO of Peabody Energy , the largest coal company in the U.S. Convenient. The National Coal Council, which had been abolished under President Joe Biden, advances coal's interests as a national security issue to power the data center revolution. And it obviously furthers the interests of Peabody Energy, Core Natural Resources , and Alliance Resource Partners . If Wright succeeds, I like all three of these. Why am I somewhat circumspect? Because there are court challenges to Wright's efforts. But if Wright is successful, these are all buys. Moreover, Core Natural has an export terminal in Baltimore that could ship coal to other countries hit by soaring natural gas prices. All three have things going for them. Obviously, Peabody, with the CEO serving as the head of the National Coal Council, can be a huge winner. Unlike most even peripheral data center ideas, it's down 20% for the year and is very cheap, seven times next year's earnings. Core Natural has been relatively flat and trades at 11 times next year's earnings. Alliance is up 8% for the year, but has a dividend yield of 9.5%. Not Late. Maybe even early. Now it takes a huge pill to swallow to back coal. Maybe you would rather get behind Altria or Phillip Morris International , although both have had monster moves. I went to hear a presentation from Phillip Morris, and it was a radically anti-traditional tobacco, as befitting a company that makes smoke-free products. But I digress. If you are thinking about buying a coal stock, you have to believe that coal plants will survive, that President Trump will finish his term, and Vice President JD Vance runs and wins. Maybe twice. That's because the utilities are so against coal. They have always been sensitive to sinking any more money into coal because they fear a Democrat president will thwart their plans. Remember, B & W traded at a dollar because it was pretty unthinkable that the president would be so pro-coal. But the data center, as a national security story, has resonance, so coal has relevance. Now, I want to go back to first principles. The data center story has tentacles far and wide. It has implications for many industries because the utility business is gigantic, with virtually unlimited capital and a desire to expand; more ratepayers mean more money. These are publicly traded entities that thrive on growth, which is why they are incredibly strong. They have come down a lot because of the rise in interest rates, but if you want to think they can turn, then choose Sempra , Southern , or American Electric Power . I come back to the data center story again and again because there are so many variables and so many ways to make money. Coal and natural gas keep emerging as avenues to prosperity. So do Eaton , GE Vernova, Vertiv , and Caterpillar . (Late, late, late?) Maybe B & W fits your speculative parameters. Maybe you want a more assured 9.5% yield of Alliance Resources. Or maybe you just want the potentially newfound growth and inexpensive stocks of Peabody and Core Natural. Or perhaps you just stick with Nvidia and own it through this week's earnings instead of trading it. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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