Alliance Resource Partners (ARLP) Q2 2020 Earnings Call Transcript

Alliance Resource Partners (ARLP 0.32%)
Q2 2020 Earnings Call
Jul 27, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. And welcome to the Alliance Resource Partners second-quarter 2020 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brian L.

Cantrell, senior vice president and chief financial officer. Please go ahead.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Gary, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second-quarter 2020 financial and operating results, and we'll now discuss these results, as well as, our perspective on market conditions. Following our prepared remarks, we'll open the call to your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties, and assumptions that are contained in our filings from time to time with the Securities and Exchange Commission, and are also reflected in this morning's press release.

While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise, unless required by law to do so. Finally, we'll also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release which has been posted on our website and furnished to the SEC on Form 8-K.

With the required preliminaries out of the way, I'll begin with a review of our results, and then, turn the call over to Joe Craft, our chairman, president, and chief executive officer, for his perspective. Coming into the 2020 quarter, ARLP was taking action to mitigate the effects of the COVID-19 pandemic which was crushing global energy demand. Specifically, we temporarily idled all of our Illinois Basin operations and our East Kentucky operation with the objective to reduce production to match existing sales commitments of approximately 28 million tons for all of 2020. We immediately focused our partnership on optimizing cash flows through numerous initiatives to reduce costs, expenses, working capital, and capital expenditures.

In addition to board of directors of ARLP's general partner, suspended the cash distribution to unitholders for the 2020 first and second quarters. At that time, due to these actions, we expected coal production and segment adjusted EBITDA from ARLP's coal operations to decline by more than half, and the contribution from our Minerals segment would be even more severely impacted in the 2020 quarter. And while financial and operating results for the 2020 quarter were significantly lower compared to the sequential quarter, ARLP's performance actually came in slightly better than we expected. I am particularly pleased to report the strong execution of our plans to optimize cash flow and control costs led to total debt reduction of $49.6 million for the 2020 quarter.

For our coal operations, ARLP's decisions have temporarily idled five of our seven mining complexes in response to the effects of the COVID-19 pandemic, led to lower coal production of 4.3 million tons in the 2020 quarter, a 46.1% reduction compared to the sequential quarter. Coal sales volumes and revenues were also impacted, falling 28.5% and 24.9%, respectively compared to the sequential quarter. Lower coal sales revenues, partially offset by lower expenses, caused total segment adjusted EBITDA from our coal operations to decline 43.7% to $55.2 million in the 2020 quarter and that compares to $97.9 million in the sequential quarter. On a per ton sold basis, coal sales price realizations rose 5% sequentially to $45.56 per ton, primarily due to an increased sales mix of higher-priced Appalachia sales tons in the 2020 quarter.

Lower coal volumes, as well as, higher excise and severance taxes and inventory charges, push segment adjusted EBITDA expense per ton higher by 11.5% to $35.95, compared to $32.25 in the sequential quarter. For our minerals segment, results for the 2020 quarter also declined compared to the sequential quarter due to reduced oil and gas demand amid the pandemic. Lower oil and gas volumes and sales price realizations caused total revenues from oil and gas royalties and lease bonuses to decline 45% to $7.8 million. Accordingly, segment adjusted EBITDA fell 50% to $6.9 million in the 2020 quarter, compared to $13.8 million in the sequential quarter.

Our minerals segment contributed 11.1% of ARLP's consolidated segment adjusted EBITDA this quarter. Weak market conditions and disruptions largely caused by the COVID-19 pandemic also impacted ARLP's results for the first six months of 2020. Total revenues decreased 41.9% to $606 million for the 2020 period, compared to $1.04 billion for the 2019 period due to lower coal sales, transportation revenues, and revenues from our mineral interest. Lower revenues, partially offset by lower operating expenses and excluding noncash items, contributed to an adjusted net loss of $34.4 million for the 2020 period, compared to adjusted net income of $164.5 million for the 2019 period.

Adjusted EBITDA for the 2020 period was also lower, falling six -- 56.2% to $146.5 million. As we manage through the current volatility, ARLP's efforts to optimize cash flows, reduce working capital requirements, and strictly controlled capital expenditure and expenses have yielded significant benefits to our financial position. Working capital requirements declined 29.6% from the sequential quarter as coal inventories were reduced by 862,000 tons during the 2020 quarter. These initiatives also lower capital expenditures and general and administrative expenses which declined during the 2020 period by 49.1% and 27%, respectively, both compared to the 2019 period.

Through the entire Alliance organization's sharp focus on these efforts, ARLP increased free cash flow by $29.2 million during the 2020 quarter, increased liquidity 15.6% to $298.6 million, and as mentioned earlier, reduced total debt by $49.6 million, all as compared to the sequential quarter. Although our total leverage increased to 1.8 times at the end of the 2020 quarter, ARLP's balance sheet remains strong and comfortably in compliance with all of our debt covenants, including total leverage covenant of 2.5 times. With that, I'll now turn the call over to Joe.

Joe Craft -- Chairman, President, and Chief Executive Officer

Thank you, Brian. Good morning, everyone. As Brian eloquently explained, the first half of 2020 presented many challenges due to the COVID-19 pandemic which negatively affected economic activity around the globe, resulting in lower demand for coal, oil, and natural gas. The entire energy industry, including ARLP, has had to react quickly to the rapid loss of demand.

Year-over-year power demand in the Eastern United States declined 7% during the first half of 2020 with coal-fired generation falling by a third, compared to the first six months of '19 -- 2019. Demand for oil and natural gas has also been crushed and the resultant oversupply has pressured commodity prices. In response, operators have curtailed production, driving oil production down to approximately 11 million barrels per day in the United States from a high earlier this year of 13 million barrels per day. The reduction of oil production also reduced associated natural gas volumes as well.

As we reported this morning, this environment exacted a tremendous toll on ARLP's financial and operating performance during the 2020 quarter and the period. The 2020 quarter was especially tough as we took aggressive action, with ARLP having to furlough more than half of its workforce for most of the quarter in an effort to match its production levels to the delivery schedules of contracted coal sales for the year. Throughout the 2020 quarter, ARLP monitored coal inventories at each location and work closely with customers to determine when it would be necessary to resume coal production. Consistent with this plan, underground coal operations resumed in May at the River View and Warrior mines in the Illinois Basin, and subsequently, at each of the remaining mining complexes, Gibson and Hamilton in the Illinois Basin and MC Mining in Appalachia.

All seven of our mining complexes are now producing coal, however, several of these mines are running at less than full capacity due to a limited domestic spot market and a seaborne market that continues to be subeconomic for U.S. production. While the pandemic continues to create uncertainty in the global economy and suppress energy demand, our customers have indicated their intention to take all tons contracted for this year, in most cases, at the minimum levels. Recently, we are seeing encouraging signs.

In the Eastern United States, improving economic activity and favorable weather patterns are contributing to increased electricity demand and coal burn which jumped 55% month over month in June. This marks the second consecutive month of increased coal burn and pushed utility stockpiles lower for the first time since August 2019. Warmer than average temperatures across much of the country have kept coal demand strong in July, as well as, with similar projections for August. We are currently targeting full-year 2020 production and sales volumes to be 27 million tons and 28 million tons, respectively.

For our oil and gas minerals business, prices are rebounding from recent lows and E&P companies are beginning to show signs of life, particularly, in the Permian Basin, where drilling activity has stabilized and we are seeing many shut-in wells returning to production and a meaningful increase in already drilled wells being completed. Although uncertainties remain, these favorable trends for ARLP's coal and minerals businesses support our cautious optimism that the second half of this year will be better than the first. With encouraging trends for coal demand expected to continue over the balance of the year and utility stockpile is currently projected to fall toward normal ranges by year-end, the outlook for coal is improving. The forward curves for oil and natural gas are also encouraging.

As discussed during our last earnings call, we continue to believe that our results for the 2020 quarter are not representative of the underlying strength of Alliance. Coal remains an essential part of the critical infrastructure necessary to meet the demands and needs of our country. Just as our federal and state governments decided when the pandemic first closed down the economy. During the recent heatwave, the essential nature of coal has again been made clear, with coal playing a vital role in keeping the power grid stable and meeting surging demand needs across the country.

ARLP's low-cost strategically located, well capitalized, long-lived coal operations will allow us to service the needs of our domestic customers, as well as, expand our market share as weaker competitors exit the market, and allow us to participate in export opportunities when international market conditions improved, hopefully, in the near future. With the reduced pace of drilling new wells, as well as, lower commodity prices, we expect our minerals segment adjusted EBITDA over the next several quarters to be at levels comparable to those reported in the 2020 quarter. Someone who has been in the minerals business for as long as I have been in the coal business, recently reminded me of the benefits of oil and gas minerals ownership. Specifically, he said, ARLP's mineral interest are concentrated in the core development areas that the premier resource plays in the United States.

That are the primary area of focus for industry-leading, well capitalized operators in these basins, providing you with a multi-decade inventory of cost free organic growth opportunities. Your growth requires no capital expenditures on your part, you own perpetual rights, and have very low holding cost. He concluded by saying, he has conviction that the U.S. will continue to be an important producer in the global oil and gas market, and that ARLP's asset base is positioned well to be the source of considerable production in the future.

I share his conviction with respect to the oil and gas, and we remain committed to our minerals business. I also believe we are equally well-positioned with our coal assets to meet the stable needs of our customers for many more years to come. As we continue to manage through these uncertainties, ARLP remains focused on the well-being of our employees, servicing the needs of our customers, and protecting our balance sheet. We remain committed to making the hard choices necessary to emerge from the current environment with a strong foundation that will return ARLP to sustainable growth in cash flows and deliver attractive long-term value for our stakeholders.

With that, I'll ask the operator to open the call for questions.

Questions & Answers:

Operator

[Operator instructions] The first question is from Mark Levin with The Benchmark Company. Please go ahead.

Mark Levin -- The Benchmark Company -- Analyst

OK. Great. Thank you very much and congratulations on the free cash flow generation and the debt reduction. A couple of just kind of quick-fire modeling questions, Brian.

I assume 2Q will be the bottom for the coal business. It looks like you guys sold a little over 12 million tons in the first half, implying maybe 16 million or so in the second half. In terms of thinking about the split between the third and the fourth quarter to get to that number, any thoughts or comments on how to think about volumes in the back half?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah. I think the sales volumes will likely be a bit higher in Q3 than they are in Q4. Most of that due, Mark, to the typical slowdowns resulting from holidays in the fourth quarter.

Mark Levin -- The Benchmark Company -- Analyst

OK. Perfect. And then on capex, it looks like you guys spent about $84 million in the first half. Is that kind of the right run rate? I mean, if you look at the second half versus the first half, sort of a comparable number? Or have you guys been kind of taking stuff out, so it would be less? Maybe how to think generally about capex in the back half of the year?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I mean, we're continuing to monitor our capex very, very closely. I do want to point out that as we do that, we still are taking a look at making sure that the operations are capitalized so they can run safely and efficiently. That's always been our priority and that won't change. Run rate in the first half is likely going to be higher than it is in the back half of the year.

We are completing, I believe, our extension at our Excel 5 Mine. So you'll see some capex occurring in the back half of this year that may be a little bit higher than it was in the first half. I think, when you look at our total capital and the bulk of what we're doing today is maintenance. We believe coming into the year, we were estimating $5.04 per ton long-term run rate.

And I expect our results in 2020 are likely going to be a little bit south of $5 a ton produced. So hopefully, that can help you.

Mark Levin -- The Benchmark Company -- Analyst

Yeah. That's very helpful. And then, just -- I know it's looking out to 2021 in the middle of the pandemic sounds sort of stupid. But just if you could remind us of what the contracted position is for 2021? And then, any -- maybe any color about price per ton or revenue per ton in terms of what's contracted to '21 vs '20.

Joe Craft -- Chairman, President, and Chief Executive Officer

Yeah, the contracted position is a little over 17 million tons. I don't have that actual revenue number for you, though. We can't give you that answer of that.

Mark Levin -- The Benchmark Company -- Analyst

In the past, Joe, you've been helpful about just kind of modulate -- or at least giving some idea about your expectations or perceptions of where the year over year might look. I mean, would it be down? If you just kind of took a snapshot today and I realize 17 million on maybe you do more than 30 million next year, hopefully, much more than 30 million. Any idea of how to think about price per ton next year? Or it's just too early.

Joe Craft -- Chairman, President, and Chief Executive Officer

It's just too early to tell. There's just so much uncertainty with the increase in cases and what that means to the economy. We have a buying season, September, October. Hopefully, by the next call, we'll have some more clarity.

But --

Mark Levin -- The Benchmark Company -- Analyst

Yeah, that's something new.

Joe Craft -- Chairman, President, and Chief Executive Officer

We do feel -- you know, before we saw this recent rise in cases, we were feeling positive that volumes could get within 90% of 2019 volumes for the industry as a whole and that we could possibly get back to anywhere from that 30 million to 35 million ton range. But right now, we're so uncertain, it's just hard to predict. That's [Inaudible]

Mark Levin -- The Benchmark Company -- Analyst

Yeah. That makes sense. Brian, SG&A has come down a lot. Is that -- is the 2Q number representative of what we should be thinking about in the second half of the year? Or it was that just kind of all hands on deck during the middle of the pandemic driving cost down?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I'd say, it's still all hands on deck and I would expect the run rate that you saw in the second quarter to be relatively stable for the next several quarters.

Mark Levin -- The Benchmark Company -- Analyst

OK. Perfect. And then my final, final question. So debt was about 1.8 times, I think you mentioned.

Also, and maybe I misread it, but just in kind of reading the press release, it sounded to me like protecting the balance sheet maybe the No. 1 priority. So as you guys continue to act -- generate excess cash, is it right to think about the priority right now being paying down debt first? And then, if that's right, then, at what level are you looking for before you would consider resuming the distribution? Or are the two not mutually exclusive? I know there's a lot in there, but more around capital structure and thoughts about excess cash.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah. They're not totally related. I think that the need to be cautious is just the uncertainty of not knowing exactly what's happening in the economy, what's happening with natural gas prices. You know, natural gas prices have been somewhat of a major impact to the coal burn over the last six months and will continue for the next three months.

There's some expectation that we'll see a rise in natural gas prices as the drilling activity has significantly declined in the oil patch. So -- and that's also impacted natural gas with the gas price. So, natural gas prices are a key issue going forward, as well as, the LNG export shipments. So I think that, back to your main point, yes, our No.

1 focus is to protect the balance sheet. So we felt during this time of uncertainty, it was best just to pull the distribution back, pay down the debt. And then once we get clarity to hopefully get some stability and predictability and demand, then, we can reassess exactly where we go from there.

Mark Levin -- The Benchmark Company -- Analyst

Great. Thanks very much. I appreciate it.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thanks, Mark.

Operator

The next question is from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, good morning, everyone, and good job on managing during these very uncertain times. Brian, I wanted to follow-up a little bit on one of Mark's questions. In regards to kind of the reduction here in output, have you considered considering permanent reductions in operating capacity? Thank you very much.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Permanent reductions in operating capacity, I mean, I think with the mines that we have running now, we obviously have excess capacity. And we plan to keep that capacity available, hopefully, when the market rebounds. Are you talking about additional mine closures?

Lucas Pipes -- B. Riley FBR -- Analyst

So besides -- so currently, it sounds like mines are running below full capacity but they're still running. And would it make sense to maybe increase capacity at a number of complexes and shut some other complexes down altogether?

Joe Craft -- Chairman, President, and Chief Executive Officer

Each of these mines have unique markets so if you -- where we are today, right now, we've got Warrior running at four units and it's running at full capacity. In August, River View will be back to 10 units which is where it was before the pandemic hit. So it's going to be up to normal capacity. Mettiki is running at full capacity.

Excel 5, our MC operation, we've been moving to a new reserve. We have one unit installed in June. We've got another one coming up pretty soon, and then, the third should be up and running where about mid-August and it is designed for a three-unit coal mine that should be running at full capacity at the end of the year. So where we've been short, Tunnel Ridge continues to work at reduced shifts.

And Hamilton has worked at reduced shifts and our Gibson operation in Indiana market's been oversupplied and that's running at reduced shifts, and all three of those are very low-cost operations. So, we would expect that all of our operations as we see it today, we're hopeful that there's continued opportunities for those mines.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah. And look, I mean, Joe talked -- just talked about the ability to run our long walls of reduced shifts. And recall, with our continuous mining operations, we have quite a bit of flexibility in how we operate those number of units running base production shifts, etc. without really destroying our cost structure.

So I -- hopefully, that answers your question.

Lucas Pipes -- B. Riley FBR -- Analyst

Joe and Brian, this is incredibly helpful. I really appreciate that detail. And maybe to follow-up on this kind of pre-pandemic consolidations in the industry was a kind of common source of discussion including on the calls with you. And I wondered how you think about industry consolidation now, a lot of distress out there, obviously, in the industry and I would appreciate your -- the perspective on that.

Joe Craft -- Chairman, President, and Chief Executive Officer

As I mentioned on the last earnings call and I've mentioned a couple of other opportunities that I've spoken since then and public continue to believe that consolidation is needed in our industry, and we're a willing participant in that. Whether that will, in fact, happen or not as I would have thought, there would have been more activity before now, but it hasn't happened and I can't explain to you why. But I do believe it's needed. I think that -- and I've mentioned this also, the issue with what's going on with Arch and Peabody, I mean that's -- I just don't understand that as to why that's happening.

I mean, it's obvious that we're in a consolidating industry and we need that to have low cost so we can compete with natural gas. And it's just so obvious, but sometimes it takes time.

Lucas Pipes -- B. Riley FBR -- Analyst

It will be very interesting to see what happens there. Maybe one last one for me and that's just in terms of your customer stockpiles. Stock levels still seem kind of fairly elevated as of the most recent EBITDA that we've been able to look at. But what's your perspective and June obviously appear to be a much stronger burn month with the heatwave and would appreciate your perspective on recent burn.

And then also, kind of how this may lead to increased contracting activity for 2021 in the back half of the year? Thank you.

Joe Craft -- Chairman, President, and Chief Executive Officer

All right. So, yeah, the recent burn and the projected burn through August has definitely been a pleasant experience right now. Given the experience we've had over the last three months where there have been deferrals. Now, there's accelerations.

August will be our highest shipping month in quite some time. July should be equal to what March was. So, we're feeling good about third-quarter shipments and the need for our customers to replenish stockpile. Those stockpiles for our major customers, in most cases, are declining with one exception, I think and that's just a decision they've made to honor the contract.

And so, they came back to us and wanted to take their full contract this year instead of deferring some tons. So -- but, in most cases, as far as our customer base, there are declining inventories and we have had conversations preliminarily as to what their expectations demand projections are for next year. They, too, have the same uncertainty as we do, but I think that we know that there are several solicitations that are going to be coming out in the September, October timeframe. Again, we're hopeful that we can get back to somewhere close to 2019 levels in 2021 and that's not -- and that's based on domestic sales only.

It does not include any export sales. And then, that's based on conversations with customers on their anticipated burn.

Lucas Pipes -- B. Riley FBR -- Analyst

This is very helpful. Joe, I really appreciate that color and Joe, Brian, and team continued best of luck. Thank you.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thanks, Lucas.

Operator

The next question is from Nick Jarmoszuk with Stifel. Please go ahead.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Hi, good morning. First question on any free cash flow generation. Can you talk about how you -- and to the extent that it's applied to debt reduction, what your thoughts are in terms of targeting the revolver versus open market purchases on bonds?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I'd say that the debt reduction would first be applied toward reduction of the revolver. We do have the ability to acquire, at some level, bonds in the open market, but our revolver has some limitations on that. So I think we would focus primarily on pulling back on the revolver, as well as, the ongoing amortization of our leasing programs.

Joe Craft -- Chairman, President, and Chief Executive Officer

Another factor that relates to that is just back to trying to determine the future as to how do we deploy that capital and that capital capacity. So everything is on the table. We would [Inaudible] bonds buyback. So I don't want you to read into what Brian is saying that until we pay down our revolver, we wouldn't participate in buying bonds.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

That's fair.

Joe Craft -- Chairman, President, and Chief Executive Officer

But right now, while we have that uncertainty, we're focused on keeping our powder grasp, so to speak.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. And then what is the limitation on bond repurchases?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I believe that basket is $50 million. We could do more. We would have to go back and get permission.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. And then in terms of the outlook for the contracting environment, you highlighted that there's excess capacity. I was hoping you could talk about how you think about the ability to maintain pricing and margins versus there being some downward pricing pressure?

Joe Craft -- Chairman, President, and Chief Executive Officer

Well, again, it depends on timing and exactly how the customers plan to take what they plan to commit. I think that it's fair to say that the contracts that are rolling off, they're higher priced than the current market. So there will be pressure on the top line. We're hopeful with some cost reduction measures that we can make up some of that margin, but there will be an impact on margin.

I don't know exactly what and how much, but to suggest that our margins would be at the same level next year compared to this year, absent the COVID-19 , I mean, you've got to sort of take the second quarter out of the picture because our cost went up primarily because of lack of volume. So, when we're looking at our cost of second half of the year versus the first half, we think we'll be going back to what are more traditional levels and more high-20 margins -- high 20%-margins in the second half. So that's the --

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK.

Joe Craft -- Chairman, President, and Chief Executive Officer

So you got to look at both the cost and the revenue side, revenue is going to be pressured some. But hopefully, we can make some of that up on the cost side.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. And then with the contracts that are above-market, can you share sort of what the tonnage associated with that is? And then, how many dollars per ton above-market you think it is?

Joe Craft -- Chairman, President, and Chief Executive Officer

Well, I don't have -- as I mentioned earlier, I don't have the actual revenue number for the 17 million tons that are currently under contract. And it's hard to answer the question because of the mix on the open tons. But we've roughly have 11 million tons open off of them and we're planning to sell 28 million tons this year. So we have 17 million tons committed.

If we are at the same rate, we'd have 11 million, if we can get it to 33 million and we got 5 more million. So it all depends on what the market is and what that plant is, and maybe, we'll have more information for you, definitely by January. But hopefully, we'll have better clarity in October.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. Well ahead. Thank you.

Operator

The next question is from Matthew Fields with Bank of America. Please go ahead.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, everyone. Just wanted to -- another modeling question for us. You did some good working capital reduction, reducing inventories in the second quarter. Can we look to any more inventory reductions or positive cash flows from working capital for the back half that you think we should be modeling in?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah. I think you'll see inventories continuing to come down and you'll see the carrying cost of that being reduced as well.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Similar to 2Q or less than that? I think it was like 36 million or 38 million that you benefited. Is that order of magnitude or less than that?

Joe Craft -- Chairman, President, and Chief Executive Officer

Over the back half of the year, it would be equal to that. I mean, we've got -- right now, we're targeting about 750,000 ton increase of -- 750,000 tons of reduced inventory in the third quarter and there's another tranche in the fourth quarter.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

So we came down 862,000 this quarter. You'll continue to see it gradually coming down over the back half of the year.

Joe Craft -- Chairman, President, and Chief Executive Officer

Yeah. So we're at $1.7 million. We'd like to end the year at maybe $600,000, $500,000 to $600,000.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. And then on -- Lucas touched on the consolidation in the sector. You know, you said you would be a willing participant, but also that you don't understand why there hasn't been more. I mean, I think that you're kind of in the pole position to be the consolidator.

So, why aren't -- why isn't there more? Is it financing questions? Is it kind of uncertainty around antitrusts given the Arch and BTU situation. There are no other buyers, so there's no urgency, like why do you think there hasn't been more because you're in a unique position to kind of pull the trigger more than anybody else, I think it.

Joe Craft -- Chairman, President, and Chief Executive Officer

It takes two parties that want to consolidate. And for whatever reason, the competitor landscape is such that they're trying to survive and they don't see the value of consolidation, I guess. I don't know. We haven't had conversations to try to affect anything, but if anybody was a willing seller they would be contacting us back to your point.

So the fact that they haven't, theirs are just not ready and I can't answer as to why that is the case.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. And then you already sort of talked about capital allocation a little bit between the distribution and sort of reducing debt. And I know you said it kind of wasn't exactly tied to debt levels, but can you give us like an idea of the matrix, the kind of factors you're looking at, whether it is the dollar value of debt, whether it is kind of a leverage ratio, keeping that sort of 2.5 times covenant in mind? Or is it more really operational in kind of the contracting environment that drives that distribution decision?

Joe Craft -- Chairman, President, and Chief Executive Officer

Again, I think it's the uncertainty of what the demand is going to be. What's the economy going to be?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

What's the pace of the recovery going to be?

Joe Craft -- Chairman, President, and Chief Executive Officer

Right and what's natural gas prices going to be and what other opportunities we have to deploy capital? So, we're trying to manage through this the best we can, trying to protect the balance sheet so that we can be prepared for both the good and the bad. So, it's the old saying, prepare for the worst, plan for the best. That's what we're trying to do. So we're trying to position ourselves to where we will be able to get through this and be stronger for it, and also, be in a position to make prudent investments along the way, and we understand the benefit of the distribution for our shareholder base.

I mean, for 20 years, we had long-term stable cash flow with growing distributions. And it's our expectation that that will continue as soon as we get predictability in those cash flows. So that when we do, in fact, start the distributions back that they will be sustainable and be somewhat predictable.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

All right. And then last one for me. I know you sort of touched on this with Nick already, but -- and I know you're limited to $50 million of bond repurchases. But don't you see the value in repur -- spending $50 million on something that yields 17% versus spending $50 million on something that yields about 3%?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah. I mean, the math is pretty straightforward. But as Joe has talked about several times this morning, it's about making sure we have availability and flexibility, pushing capital out the door to repurchase bonds, not able to get that back. And given the uncertain environment that we're in, I think our -- at this point in time, our focus on debt reduction will continue to be around the revolver, not taking the other off the table.

But we want to maintain that flexibility until we get a bit more clarity and predictability in what the future may hold.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. That's fair enough. Thanks very much.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

The next question is from Lin Shen with Hite. Please go ahead.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Hey, good morning. Thanks for taking the call. I just want to ask a quick question. So for your second half this year, $16 million sales volume and also for 2021, $17 million sales volume or contracted volume, what is the mix between Illinois Basin and the Appalachia coals?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I'd say the Appalachia coals are more exposed. So, the Illinois Basin has more contracted tons on a percentage basis than Appalachia ton.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

OK. So should we think about the second half, their percentage or their mix is going to be the same like in first half? Or are going to be maybe similar to 2019 level?

Joe Craft -- Chairman, President, and Chief Executive Officer

Well, I'm talking about 2021 when I made that comment.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

OK.

Joe Craft -- Chairman, President, and Chief Executive Officer

As far as 2020, we're sold out. So everything's contracted for that we plan to produce in 2020.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Got it. And I guess, I'm trying to also ask that when you talk about maximize your margin or so, how should we think about the margin between Illinois Basin and Appalachia coals and what is the best strategy for you to maximize their margin? Should we think about the more Appalachia coal the better or they are no -- or not really?

Joe Craft -- Chairman, President, and Chief Executive Officer

I think the key issue for Appalachia is the met market. So we've sold around 500,000, 600,000 tons in the met market. And right now, if you would look at the prices for the met market, they would be down year over year, '21 versus '20. So, we'll have to see how that develops.

I think on the export markets, we have seen the dollar depreciate recently, I think it's at a 22-month low. I've seen projections among the various banks that suggests that that's going to continue. So the second half of next year potentially has another 10% decline. So all that would help the export market.

I guess, that's one reason why you're seeing the price -- API 2 show contango into 2021. Another factor to that on the steam side is the low natural gas prices this year versus next year. But on the met side, if all gets back to the economy and steel production continues to be rather strong, really compared to the demand destruction we've seen on the energy side as to what's going on around the world in the global economy. There's a lot of stimulus dollars that are out there so -- will we get a stimulus billed for infrastructure plans? We'll encourage more steel production next year.

I mean, it's a lot of money being thrown around by governments to try and get people back to work. So it's really hard to predict.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Thank you very much. I appreciate it.

Operator

The next question is a follow-up from Mark Levin with The Benchmark Company. Please go ahead.

Mark Levin -- The Benchmark Company -- Analyst

OK. Yeah, great. I think Lin was kind of getting at it on the met side a little bit. And I was trying to think about price realizations in the second half of the year, Brian.

Any reason why there would be material changes from Q2 to Q3 in terms of price realizations? Anything going on from a mix perspective or some other reason? Or is this just kind of a -- I know you guys have sold everything, but maybe how to think about price realizations, at least in the near term?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah. I think the mix, obviously, in the second quarter, benefited from the higher mix of Appalachian relative to Illinois Basin.

Mark Levin -- The Benchmark Company -- Analyst

Yeah.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I think, if you look at current expectations for Q2 -- Q3 and Q4, you're probably going to see average realizations closer to what they were in Q1 as the mix returns to a bit more normal level.

Mark Levin -- The Benchmark Company -- Analyst

OK. No, that's great. That's very helpful. And then liquidity, I think you boosted liquidity, I guess, $40 million.

So you're up at -- you're up around $300 million. Is there a minimum that you guys would like to keep on hand? Is there some targeted level where you just feel like to run the business you need to make -- and given sort of the vicissitudes of the capital markets and the craziness of it that there's just a minimum amount you need to have?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I think we've said in the past that somewhere in the $250 million range or so --

Mark Levin -- The Benchmark Company -- Analyst

OK. OK.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Is what we would like to target, but we can be flexible to some degree around that, just depending on circumstances from time to time.

Mark Levin -- The Benchmark Company -- Analyst

OK, sure. OK, great. That's it. Thanks very much for all your time today.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

[Inaudible] Mark.

Operator

[Operator instructions] The next question is from Shelly McNulty with Loomis Sayles. Please go ahead.

Shelly McNulty -- Loomis Sayles & Company, Inc. -- Analyst

Hi, yeah. I just wanted clarity on a comment you made earlier. I think you had referenced wanting -- thinking that you could potentially get back to 2019 levels in 2021 and that was excluding exports. So I just want to make sure I understand.

Are you thinking that you could get 39 million tons of domestic volumes in 2021? And then on top of that, any export could be in addition to that? Or were you thinking more --

Joe Craft -- Chairman, President, and Chief Executive Officer

No.

Shelly McNulty -- Loomis Sayles & Company, Inc. -- Analyst

The 32 million of domestic is kind of what you're aiming for in total for 2021?

Joe Craft -- Chairman, President, and Chief Executive Officer

Right. It's more the latter.

Shelly McNulty -- Loomis Sayles & Company, Inc. -- Analyst

OK. OK.

Joe Craft -- Chairman, President, and Chief Executive Officer

Thank you for the clarification. Looking at domestic sales with no export sales currently projected.

Shelly McNulty -- Loomis Sayles & Company, Inc. -- Analyst

OK. OK. Got it. And then on the question with the debt repayment preference right now, revolver over the open market purchases.

The choice to pay down the revolver, that wasn't influenced at all by your anticipation or maybe what you're seeing now of having to up the letters of credit needed for surety bond security or anything like that. Can you just comment on that?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

It had no influence on that at all. We had not, at this stage, seen a significant increase in our collateral required on our surety at this point.

Shelly McNulty -- Loomis Sayles & Company, Inc. -- Analyst

OK, great. That's mine. That's all my questions. Thanks.

Bye.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Gary. We appreciate your time this morning, as well as, everyone's continued support and interest in Alliance. Our next call to discuss third-quarter financial and operating results is currently expected to occur in late October, and we hope you can join us again at that time. This concludes our call for today.

Thanks to everyone for your participation and continued support.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Joe Craft -- Chairman, President, and Chief Executive Officer

Mark Levin -- The Benchmark Company -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Shelly McNulty -- Loomis Sayles & Company, Inc. -- Analyst

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