Finding successful coal companies is a tough task. The surging demand for natural gas in the United States, combined with increasing regulatory scrutiny of coal plants, has resulted in deteriorating economics for the coal industry. This means that in order to succeed, coal companies need to be at the right place at the right time. In other words, focusing intently on low-cost coal is imperative in order for coal companies to compete.
Most coal companies simply aren't succeeding in this regard. Alliance Resource Partners (NASDAQ: ARLP ) , however, is—and investors would be wise to get to know this company before dismissing all coal companies as one and the same.
How Alliance Resource Partners' strategy sets it apart
Investors may be understandably questioning how a single coal company can thrive amid such a poor environment for coal in general. A huge part of Alliance Resource Partners' success is because of its specific product mix and geographic positioning. As the company demonstrates in a recent presentation, while overall demand for coal is fairly lackluster due to surging demand for natural gas, demand for its coal output is stable.
That's because Alliance Resource Partners is heavily geared toward Illinois Basin and Northern Appalachian coal. Coal from these regions is produced at such a low cost that it can still compete with natural gas. The average cash cost of Northern Appalachian and Illinois Basin coal stands near $1.50, roughly half the level of Central Appalachian coal.
That's why total production of Illinois Basin and Northern Appalachian remains strong this year at roughly 260 million tons, which is only expected to increase through 2017. In comparison, production of Central Appalachian coal is falling off a cliff, and is expected to drop all the way to 100 million tons by 2017.
Alliance Resource Partners is set up very well to capitalize on these trends. Consider that 95% of Alliance's 2012 production and 98% of its coal reserves come from Illinois Basin and Northern Appalachian coal.
How competitors are falling behind
By contrast, a great deal of Alpha Natural Resources' (NYSE: ANRZ ) production is Eastern steam coal, which is not performing well in the current environment. 51% of Alpha Natural Resources' coal reserves and 46% of its revenue mix is Eastern steam coal.
Clearly, Alpha Natural Resources' domestic coal operations aren't doing very well, so it's counting on global growth to make up the difference. Alpha Natural Resources is a leading metallurgical coal producer, which is a primary input for the steel industry. However, the company is not forecasting strong global growth for metallurgical coal, as the worldwide steel industry is still struggling from the devastating effects of the recent recession. In fact, Alpha Natural Resources warns investors of the possibility that global metallurgical cutbacks may increase going forward. As a result, its future outlook remains cloudy.
The same is true for CONSOL Energy (NYSE: CNX ) , which has resorted to selling coal mines in light of its own production woes. CONSOL's coal production was lower in 2012 than in 2009. One bright spot for CONSOL is that it's refocusing itself on natural gas to adapt to the changing domestic energy landscape. For example, earlier this year CONSOL announced it would sell five of its coal mines to privately held Murray Energy in a deal worth $3.5 billion.
It will use these proceeds, along with additional funds saved from the company's decision to cut its dividend in half, to further expand its natural gas production. The strategy seems to be working, as CONSOL's gas production more than doubled from 2009 to 2012.
Alliance Resource Partners: one coal company worth buying
The coal industry is in trouble, but not all coal companies are suffering. Alliance Resource Partners has produced record results quarter after quarter, thanks to its wise product mix and geographic positioning. Furthermore, its hefty 6% distribution is simply icing on the cake, which Alliance Resource Partners has actually increased for an amazing 22 quarters in a row.
That's why, despite the dour outlook for most coal companies in the United States, there's still one coal company worth investing in: Alliance Resource Partners.
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