Alliance Resource Partners (ARLP) Q2 2021 Earnings Call Transcript

Alliance Resource Partners (ARLP -1.63%)
Q2 2021 Earnings Call
Jul 26, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Alliance Resource Partners, L.P. second-quarter 2021 earnings conference call. [Operator instructions] Please note, this conference is being recorded.

I will now turn the conference over to Mr. Brian Cantrell, senior vice president and CFO. Thank you. You may begin.

Brian Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Sherry, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second-quarter 2021 financial and operating results, and we will now discuss these results as well as our perspective on market conditions and outlook. 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.

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, our 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 statements, 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 for the quarter, and then I'll turn the call over to Joe Craft, our chairman, president, and chief executive officer, for his comments. As we reported earlier this morning, Alliance delivered strong results for the -- during the 2021 Quarter, posting significant increases to our major operating and financial metrics, compared to the sequential quarter, reflecting improved performance from both our coal operations and our royalty segments, total revenues increased 13.8% to $362.4 million, net income jumped 77.9% to $44 million, or $0.34 per unit, and EBITDA climbed 25.7% to $118.6 million. Contributing to these exceptional results was the shipment of tons delayed during the sequential quarter.

If you recall our release from last quarter, shipments for 950,000 tons were delayed by weather-related transportation disruptions and an unplanned customer outage, which impacted our cash flow and EBITDA by approximately $13 million. At that time, we anticipated customers would make up these tons over the balance of this year. With strong power demand and utilities calling on coal to meet this demand, the timing of delivering these delayed shipments was largely accelerated into the 2021 quarter. Absent these timing issues, results for the 2021 and sequential quarters would have been comparable.

With these increases and our continued focus on controlling costs, expenses, and capital, ARLP generated $79.4 million of free cash flow in the 2021 quarter. We utilized this cash flow to return $12.7 million to unit holders through our quarterly distribution and to reduce total debt and finance lease obligations by $59.5 million. We ended the quarter with liquidity of $500.5 million and reduced our total leverage to 1.08 times, a 32.1% improvement since the beginning of this year. ARLP's financial and operating results for the 2021 quarter and the first half of 2021 were significantly improved compared to the 2020 quarter-end period, which were negatively impacted by the pandemic.

Compared to the 2020 quarter, total revenues increased 42% in the 2021 quarter while net income jumped by $90.7 million, and EBITDA climbed 145.9%. For the 2021 period, coal sales volumes increased 18%, compared to the 2020 period driving total revenues higher by 12.4% to $681.1 million, reflecting ongoing cost control and efficiency initiatives at our mining operations, offset in part by increased selling expenses resulting from higher coal sales volumes, operating expenses declined to $409.6 million for the 2021 period, compared to $421.5 million for the 2020 period. Net income increased $260.2 million to $68.8 million for the 2021 period, reflecting higher revenues, reduced operating expenses, lower depreciation, and $157 million of noncash impairment charges incurred in the 2020 period. Excluding the impact of these impairment charges, net income of $68.8 million for the 2021 period, compares to an adjusted net loss of $34.4 million for the 2020 period.

EBITDA for the 2021 period increased 45.3% to $212.9 million, compared to adjusted EBITDA of $146.5 million in the 2020 period. Turning from our consolidated results, let's now take a closer look at the performance of the ARLP's business segments. At our coal operations, sales tons increased 14.9% during the 2021 quarter, as strong coal demand allowed us to deliver approximately one million tons of coal shipments delayed from the sequential quarter, as I discussed earlier. Increased coal sales volumes more than offset lower price realizations, leading coal sales revenues higher by 13.4% to $326 million compared to the sequential quarter.

Increased volumes and the continued benefits of ongoing cost control and efficiency initiatives at all ARLP coal mines drove segment adjusted EBITDA expense per ton sold lower to $27.90, a 6.1% reduction,. compared to the sequential quarter. Increased revenues and lower per ton operating expenses drove segment adjusted EBITDA for our coal operations higher by 25.7% to $113.9 million. ARLP's royalty businesses also performed well during the 2021 quarter, delivering $22.2 million of segment adjusted EBITDA, an increase of 15.3% over the sequential quarter.

Of this total, oil and gas royalties contributed $15.4 million to segment adjusted EBITDA during the 2021 quarter, a sequential increase of 28.7% on the strength of significantly higher commodity prices. As expected, coal royalties delivered relatively stable results for the 2021 quarter posting segment adjusted EBITDA of $6.8 million. With that, I'll now turn the call over to Joe. Joe?

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

Thank you, Brian. As Brian mentioned, ARLP's operating and financial performance for the 2021 quarter improved significantly compared to both the sequential and 2020 quarters. Looking ahead, coal market fundamentals are extremely favorable both at home and abroad, prompting us to increase our full-year 2021 guidance. We are increasing the midpoint of our targeted total coal sales volumes for 2021 by 1.8 million tons or approximately 6% to 32.9 million tons.

Over the past two months, commodity prices for each of our business segments have skyrocketed. In our primary U.S. markets, year-over-year power demand has surged 7.5% through the first half of 2021, rising natural gas prices have driven coal consumption higher for the 2021 period. According to Argus, June coal generation in the PJM hit a three-year high, while MISO and SPP grids reported increased coal demand of 37% and 42%, respectively.

For the full year, coal consumption in the U.S. is expected to rebound 16%. Increased domestic demand is coming amid declining utility stockpiles, constrained supply response, and a robust export market. International coal demand is rising as global economic expansion post COVID-19 has lifted power demand and higher LNG prices have favored coal generation.

IHS market currently projects U.S. thermal coal exports will climb to a range of 41 to 45 million short tons this year, compared to 26.7 million short tons in 2020. Alliance has responded to these favorable market conditions by significantly strengthening our contract position during the 2021 quarter. Booking new commitments to deliver 8.7 million tons through 2024, including 2.5 million tons into the export markets.

For 2021, we are targeting export sales volumes at 4.4 million tons, compared to a little less than 1 million tons last year. We are actively evaluating opportunities to further increase production and sales in response to expectations for continued strong coal demand, and pricing through 2022. However, the current tight labor market may limit what we can accomplish in this regard. Market fundamentals for ARLP's royalty businesses are also favorable.

Increased coal sales volumes from ARLP's mining operations should benefit our coal royalty segment, and we are raising the midpoint of estimated 2021 royalty tons sold by 3.3%. For our oil and gas royalty segment, drilling, and completion activity continues on our acreage, with 103 new gross horizontal wells spud and 182 gross horizontal wells brought into production during the 2021 quarter. As a result, we are again increasing our 2021 full-year oil and gas production expectations. ARLP's oil and gas price realizations have increased throughout the year and the current forward price curve remains strong.

With expectations of increased oil, gas and coal production, and strong commodity pricing, we believe the contribution of our royalty segment of ARLP's consolidated results and will continue to grow. With our strong year-to-date performance and positive outlook, ARLP is well positioned to pursue our objectives of optimizing the cash flow and value of our existing assets, and pursuing growth opportunities that we believe have the potential to generate attractive returns. That concludes our prepared comments, and I'll now ask the operator to open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Nathan Martin with Benchmark. Please proceed.

Nathan Martin -- The Benchmark Company -- Analyst

Hey. Good morning, gentlemen. Congrats on the quarter.

Brian Cantrell -- Senior Vice President and Chief Financial Officer

Thanks, Nate.

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

Thank you.

Nathan Martin -- The Benchmark Company -- Analyst

I guess first, just I'll start with a question on incremental pricing. It looks like you guys committed and priced an additional about 3 million tons in the domestic side, another 2 million tons on the export side for '21 since the last quarter. Can you give us a sense maybe on pricing on those tons?

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

Some of that timing is -- was before this recent price run-up, but we were able to get some of it on the back end. We have factored that in to our increased pricing on -- in our guidance where we increased the bottom -- the lower end of the range on our average sales price. So when you look at the midpoint, I think that raises the price around $0.50 a ton for all tons, that helps you in understanding the increase in revenue for the year on a sales-price basis.

Nathan Martin -- The Benchmark Company -- Analyst

OK. Thanks, Joe. And, I mean, I guess you mentioned pricing. We've had that increase.

And based on what I'm seeing out there, basin prices seem to be up maybe $7 just this month. They're like the mid-40s or more now and not prices are $50-plus, and API-2 was $130-plus in the front month. So is that kind of similar to what you guys are seeing in the market as well?

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

It's really hard right now. I mean there are people that are interested in the volume -- trying to price some volumes for the back half. There's limited coal available. If you look at our open position at the quarter end, we were right at about 1.8 million -- or excuse me, 1.4 million tons, I believe.

And we -- right now, we're probably a million tons that we have to sell. So we are seeing pricing in that level in the current time frame. As you look out the fourth quarter, some people are suggesting that price would go lower. I don't really see that.

I don't how there can be inventory restocking, given the tight supply in the domestic market. So I think the pricing is going to remain very strong for the back half of this year and rolling into the first quarter. So we'll see exactly whether these utilities will, in fact, transact at these price levels, or whether they'll just continue to draw down inventory, which also has been significantly reduced since our last call. So we're in interesting times.

Nathan Martin -- The Benchmark Company -- Analyst

All right. Got it. I appreciate that. And then I guess just if pricing does kind of remain at these levels, Joe, as you point out, and hopefully, through the back half of the year into next year, maybe Brian or Joe, can you comment on potential priorities for your free cash flow?

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

So as we are thinking about what those would be, we probably will -- we're not in a position to tell you exactly right now because there's so much uncertainty as to what the price is going to be next year. When you look at most of the curves, they are very heavily backwardated for next year. As I just mentioned, we think they're going to be higher than what the different indexes are showing. But it's -- until we see more certainty in that regard.

It's hard to respond to exactly what our cash flow capital allocations are going to be going into next year. So we'll be prepared at our next call to have better clarity on that, and we'll be able to address that at that time.

Nathan Martin -- The Benchmark Company -- Analyst

OK. I appreciate that. I guess just real quickly, if I'm looking at the cost side, fantastic cost quarter for you guys, especially in Appalachia. Obviously, you tightened your full-year cost guidance to look like, but that does seem to imply some kind of cost creep in the second half.

We also combine that with, it looks like the shipments should be up in the second half, versus the first half based on your guidance. So maybe give some color on that potential increase in costs?

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

We have experienced some pressure, inflationary pressures with steel, with oil, labor availability. So there is some pressure from an inflationary standpoint in the second half. And we also have a long-wall move at our operation in the next quarter, that is built into that. We've got some met shipments next quarter that are higher cost than what we experienced in the second quarter at Mettiki.

So that's weighing on the cost side. But on the flip side, with the increased production, that production is primarily coming from our lowest-cost mines. So you're seeing a blend to where we're still able to maintain our cost at levels consistent with what we projected at the beginning of the year, notwithstanding some of the inflationary pressures that we're experiencing. The main question, are those transitory or not.

We've had some feedback on the steel side that was suggesting that the steel surcharge that we have been living with now for a month or so, and we'll follow through -- will continue through the end of the year, will more than likely be lifted sometime in the first quarter based on current projections of next year.

Nathan Martin -- The Benchmark Company -- Analyst

Great. And just to clarify, Joe, when you mentioned longwall move at the Mettiki next quarter, are you saying fourth quarter or are you saying the third quarter?

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

Yes. Third quarter.

Nathan Martin -- The Benchmark Company -- Analyst

Got it. Appreciate it, guys. And then just one last final question. I mean, I noticed you raised your capex budget by about $5 million like.

Can you just elaborate maybe on what's driving that small increase. That's all. Thanks.

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

Yes. I think -- I don't know, Brian, you have details on that.

Brian Cantrell -- Senior Vice President and Chief Financial Officer

Yes. I think the fact that our production is increasing, maintenance capital will be a bit higher over the back half of the year than we originally anticipated. But to your point, Nate, it's a relatively minor increase, and we're just trying to reflect that increased production level.

Nathan Martin -- The Benchmark Company -- Analyst

Perfect. Hi, guys. Again, always appreciate the time and best of luck in the third quarter.

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

Thank you, Nate.

Operator

Our next question is from Matthew Fields with Bank of America. Please proceed.

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

Hey, everybody. I appreciate that you're still seeing a little bit of uncertainty in futures price to talk too detailed about capital allocation. But you've historically kind of talked about one time leverage as kind of a comfortable level for you all, and you hit it this quarter. So just wondering kind of where you think about leverage going forward? Are you comfortable kind of here, do you want to take that one time leverage and maybe take it lower? Or are we going to see increased use for investment or shareholder returns now that you've hit that bogey?

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

Yes. I mean, we're continuing to focus significantly on growth. There are several opportunities we're pursuing as we speak. So I think growth continues to be in front of our mind.

I think that paying down debt, we paid down more than we anticipated based on our strong performance in the first half. And we'll continue to do that. I think we will relook at the distributions as we think about what our cash flows will be in 2022 starting probably in the next -- at our next meeting. So we'll add more clarity on that.

But our target has always been at a one-time level if we do these acquisitions, every one of them were looking at are accretive. However, that could pop up our coverage ratio for a small time, but we would be focused on maintaining or getting back to a one-time level target. And -- so the key question again is back to what our commodity price is going to be and what kind of volume can we bring to the market in 2022 going forward. So we're -- again, labor is short and it's tight.

I don't know when the better all additional benefit is removed in September, whether that's going to help this infrastructure bill, if that's passed, and then there's more stimulus, what that's going to do to labor demand. It's -- I've never seen anything like it in my career to where you've got plenty of jobs and yet you still have people that are on the unemployment roles not wanting to work. So hopefully, we'll get back to encouraging people to make an economic contribution to our country and get back into the labor pool, so we can take advantage of these opportunities.

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

Thanks. Speaking of labor, we've seen kind of a pickup in kind of union activity in the steel sector. One of your fellow coal miners in Alabama is going over 100 days on the strike now. Can you just talk about kind of when you have collective bargaining agreements coming due what are the -- how are the relations with your union workers and kind of what you expect to see for continuing our labor force in the mine?

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

So we're a non-union operator. So we've been union pretty since inception, 1971. So we do not have any labor contracts. We're very focused on having a culture of focused on trying to have great relationships with our employees.

And we continue to do that by constant communication. And so as I mentioned, there is a shortage where we would like to be able to grow. And unfortunately, it just -- it's tough finding people who want to enter the co business right now, in large part because of all the news headlines, I believe, and we're trying to convince our customers to come forward and enter into longer-term contracts or at least give a shout out to to our employees to let them know that they're needed for the next two decades. And we were able to have one of our customers do that last Friday.

And it was very well received. So from a labor perspective, our key issue is just trying to ensure to our employees and any prospective employees that they've got a future in co industry for the next 20 years. And I believe they do, but it would be nice if we can get some further commitments from our customer base that reinforces that long-term view for our employees.

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

All right. Thanks. That's very helpful and good luck for the rest of the year.

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

Thank you.

Operator

[Operator instructions] Our next question is from Bill Gushard with Atlas Merchant Capital. Please proceed.

Bill Gushard -- Atlas Merchant Capital LLC -- Analyst

Hey, guys. Congrats on a great quarter.

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

Thank you, Bill. Good morning.

Bill Gushard -- Atlas Merchant Capital LLC -- Analyst

Morning. Can you discuss a little bit about the investments you've made historically into the royalty portfolio, specifically oil and gas? I think you added to that, you added to that exposure at the end of '19. And I don't think we've really seen the full EBITDA or free cash flow potential. And maybe discuss also what you think the stand-alone value of that might be just based on what you're seeing in the market for valuations.

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

Yes. Stand-alone value, if you look at the other pure-play oil and gas royalty companies, you're seeing trading multiples in the high-single digits, low double-digit type area. So if you look at our current expected cash flow out of our royalty business, you can do the math and we're clearly not, in our view, getting the full value for the cash flow that those assets are bringing to the table. And our current EBITDA this quarter of 22.2 million, run rate close to 80, 85 million.

The math is pretty compelling in terms of what the overall value is. And you're correct, we have not made additional investments in that since late 2019. Obviously, with the market collapsed during the pandemic, cessation of drilling, shut-in of production, etc. Availability of assets at that point in time really just dried up.

We are beginning to see increased activity as commodity prices have improved As we mentioned in our prepared comments, drilling activity, while not back to pre-pandemic levels, has certainly picked up. And we're hopeful we are seeing opportunities come across our desk that may make some sense. And we're hopeful that that market continues to reopen that we'll be able to transact.

Bill Gushard -- Atlas Merchant Capital LLC -- Analyst

Good stuff. Thanks.

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

You bet, Bill. Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for closing comments.

Brian Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Sherry. We appreciate everyone's time this morning as well as your continued support of and interest in Alliance. Our next call to discuss our third-quarter 2021 financial and operating results is currently expected to occur in late October, and we hope you'll join us again at that time. This concludes our call for today.

Thanks to everyone for your participation.

Duration: 33 minutes

Call participants:

Brian Cantrell -- Senior Vice President and Chief Financial Officer

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

Nathan Martin -- The Benchmark Company -- Analyst

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

Bill Gushard -- Atlas Merchant Capital LLC -- Analyst

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