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Slumping Volumes Slice Into Alliance Resource Partners, L.P. Earnings

By Matthew DiLallo – Jul 26, 2016 at 1:00PM

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The coal MLP is starting to see some positive signs in the coal market.

Image source: Getty Images.

The coal market remained weak during the second quarter and continued to weigh on the results of coal master limited partnership Alliance Resource Partners (ARLP -1.88%) and its general partner, Alliance Holdings GP (NASDAQ: AHGP). However, while the weak market had a noticeable impact on its results compared to the same period last year, the company did see an improvement over last quarter. Furthermore, it's starting to see some signs of life in the coal market, which led it to provide a slightly more optimistic outlook for the balance of the year.

Alliance Resource Partners results: The raw numbers

 

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$439.2 million

$604.7 million

-27.4%

Distributable cash flow

$122.1 million

$149.4 million

-18.3%

Distribution coverage ratio

2.3 times

1.73 times

32.9%

YOY = year over year. Data source: Alliance Resource Partners. 

What happened with Alliance Resource Partners this quarter?

Alliance Resource Partners continues to feel the pressure of the tough coal market.

  • Coal sales slumped 24% year over year to slightly less than 8 million tons as a result of the company's decision to idle mines and cut output. However, coal volumes were up 6.8% sequentially after the company secured additional coal sales agreements.
  • Coal prices, likewise, were muted thanks to the overall lackluster demand. Prices were down 2% year over year and 1.4% versus last quarter.
  • The combination of weaker volumes and lower prices cut deeply into revenue and earnings. However, the company's cost-cutting measures were able to mute the negative impact on profits somewhat. In fact, underlying earnings were up substantially quarter over quarter, with segment-adjusted EBITDA up 22.4% while distributable cash flow jumped 42.3%.
  • As a result of the stabilization in the company's distributable cash flow, Alliance Resources and Alliance Holdings GP are maintaining their distributions at the current level.

What management had to say

In commenting on the company's results, CEO Joseph Craft said:

ARLP once again delivered solid results in the 2016 Quarter. Our teams continued to perform well, overcoming continuing challenges facing our industry to deliver strong sequential increases to ARLP's key operating and financial metrics. Our marketing group successfully drove increased coal sales volumes in the 2016 Quarter and secured additional coal sales agreements to further strengthen our contract portfolio. Operationally, ongoing efficiency initiatives continued to result in lower operating expenses and capital expenditures. Our finance group also made progress in its efforts to enhance ARLP's liquidity by completing a new $33.9 million capital lease transaction.

The highlight of the quarter was Alliance Resource Partners' ability to secure contracts for additional coal volumes. This accomplishment not only drove the sequential improvement in its results but will put a floor under its results in 2016. It's a welcomed sight, to say the least.

Looking forward

As Craft went on to note, "We are beginning to see some positive signs in the domestic thermal coal markets." In particular, rising natural gas prices and the hot summer are causing utilities to burn more coal. This should support stable coal demand and pricing in the near term. Further, the company sees coal markets returning to balance next year, which should drive further coal price improvements. As a result of this outlook, the company is slightly raising its full-year guidance on volumes, pricing, and earnings.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Alliance Resource Partners Stock Quote
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ARLP
$22.45 (-1.88%) $0.43

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