Texas Attorney General Ken Paxton and 10 other AGs recently filed a misconceived lawsuit against BlackRock, State Street, and The Vanguard Group, three of the largest investment firms in the world. This suit is wrong regarding the facts about the energy industry and coal production, and wrong regarding energy policy and politics.
Their claims present a radical, unprecedented expansion of antitrust and consumer protection laws and would have significant consequences for President Trump’s energy dominance agenda, the exposure coal companies face to litigation, and the ability of millions of Americans to use successful index funds. Moreover, this misguided lawsuit against large asset managers is producing a buying opportunity in coal.
The Attorneys General’s claims about the coal industry and energy prices are contradicted by the facts, as well as by several AGs and coal companies listed in the complaint.
While the suit alleges conspiracy by BlackRock, State Street, and Vanguard through their stock holdings in the nation’s largest coal producers, such as Peabody Energy Corp and the then Arch Resources, to decrease coal production between 2021 and 2024, the facts indicate thermal coal production in the United States has been steadily declining for nearly two decades, a trend that began well before 2020. This decline has been similar across both public and private coal companies.
U.S. Energy Information Administration (EIA) data shows that in 2001, U.S. annual coal production was 1.127 trillion short tons; by 2020, that number had declined significantly to 535 billion short tons. Additionally, the influx of shale gas was a major driver in the energy market, driving natural gas prices down substantially. As a result, coal, which was historically cheaper, could no longer compete with these low prices, especially for electricity generation, amidst rising production costs and aging or retiring coal plants.
The state AGs’ theories are radical and unprecedented. The state AGs fail to establish basic requirements of a Sherman Act violation and do not outline any facts to show BlackRock, State Street, and Vanguard made any agreement or discussed coal production volumes. Indeed, the complaints’ own allegations suggest an absence of any conspiracy to reduce coal output.
The three asset managers are all purely passive, minority investors in coal companies through index funds. The State AGs fail to show that BlackRock, State Street and Vanguard’s acquisitions in coal companies via the passive index funds they manage substantially lessened competition in violation of Section 7 of the Clayton Act.
Most importantly, if successful, the AGs lawsuit would be profoundly disruptive and anticompetitive in both the coal and asset management markets, forcing them to divest from coal, resulting in a roughly $18 billion sale across the three firms.
In April of this year, President Donald Trump signed an executive order that called coal production vital to American national security. Unfortunately, this lawsuit is driven by political motivations and directly undermines the Trump administration’s energy dominance agenda, Texas’ pro-business reputation, and consumers’ interests. Notably, since the suit’s filing, several prominent AGs from the major coal producing states of Ohio, Kentucky, and Virginia have chosen to stay out of the case.
Nevertheless, I am a contrarian. I believe that wisdom and common sense will eventually prevail in this situation, leading us to the buying opportunity of some of the companies named in the suit, such as Peabody Energy Corp (BTU) and the former Arch Resources—now trading as Core Natural Resources (CNR) following its merger with Consol Energy. Supporting this buy recommendation, BTU is currently discounted, down 25.6% YTD. Similarly, CNR is down 30.5% YTD.
These price levels represent great buying opportunities, as most of the negative news is already priced into the market. BlackRock, State Street, and Vanguard are already backing away from ESG under the Trump administration. Actually, they could even increase their investments in these companies, given the president’s recent executive order and other actions supporting coal and the efforts to prevent additional coal plant retirements.
Of course, in the remote case that the suit does go to trial and there is mandated divestment that results from an adverse ruling, that would likely put additional negative pressure on coal producers named in the suit, like the aforementioned Peabody Energy Corp and Core Natural Resources, as well as others such as Hallador Energy Company, NACCO Natural Resources, Warrior Met Coal, Alpha Metallurgical Resources, Black Hills Service Company, and Vistra Energy. That potential outcome, as unlikely as it may be given the merits of the case, makes this suit worth watching. Concentrated exposure to these other names can be found in the Range Global Coal Index ETF. I agree with the key points Range makes in this fact sheet for the fund.
However, I feel President Trump will realize that this suit is not aligned with his agenda and will make the call to both the Federal Trade Commission Chair, Andrew Ferguson, and to this handful of Republican attorneys general to cease and desist their quixotic pursuit of this case. This would create a win-win on all fronts, including investors in the metallurgical and thermal coal industries.
