Better Buy: Alliance Resource Partners LP vs. Foresight Energy LP

This is a no-brainer, unless you're really aggressive and into turnaround plays.

Reuben Gregg Brewer
Reuben Gregg Brewer
Jun 13, 2017 at 10:24AM
Energy, Materials, and Utilities

Coal is a deeply out-of-favor industry plagued in recent years by high-profile bankruptcies. Alliance Resource Partners LP (NASDAQ:ARLP) and Foresight Energy LP (NYSE:FELP), however, both managed to avoid a trip through bankruptcy court. But that doesn't mean they are equally desirable to own. In fact, Alliance is by far the best buy when considering these two coal miners.

Barely squeaking by

Foresight Energy didn't have to seek bankruptcy protection during the deep coal downturn. That gives it a leg up on competitors like Peabody Energy (NYSE:BTU) and Arch Coal. But avoiding bankruptcy court shouldn't be confused with doing well.

A coal miner in a mine

Image source: Getty Images.

For example, Foresight lost money in each of the last two years. It was forced to eliminate its distribution in 2016, a real black eye for a limited partnership, which is a corporate structure specifically designed to pass income on to unitholders. And it's heavily indebted, with long-term debt making up roughly 55% of the capital structure. 

That last fact, however, deserves a closer look. At the end of 2016, long-term debt made up more than 100% of the capital structure because of a limited partner deficit. The big change between the end of the year and the first quarter was due to a financial restructuring that was completed outside of bankruptcy court. In other words, Foresight has faced some mighty struggles.  

ARLP Dividend Per Share (Quarterly) Chart

ARLP Dividend Per Share (Quarterly) data by YCharts.

On the positive side, Foresight has done a lot of heavy lifting that should help ensure its survival. That means there's upside potential for more aggressive investors looking at turnaround situations. But if what you're looking for is a good coal company, it's really not worth taking on that kind of risk.

The best coal stock

Which is where Alliance Resource Partners comes into play. For starters, this miner has remained profitable throughout the coal industry downturn. That's an impressive feat in an industry filled with red ink (and bankruptcies) and shows a resilience that few, if any, other miners possess.  

To be fair, Alliance did trim its distribution in 2016. However, it didn't eliminate the disbursement and the cut had more to do with assuaging the concerns of frightened capital markets than the need to preserve cash. In fact, the company covered its lowered distribution by a massive two times in 2016. For reference, coverage of 1.2 times is generally considered pretty good for a limited partnership. And Alliance recently hinted that distribution growth could be in the cards if coal prices hold near current levels.  

ARLP Chart

ARLP data by YCharts.

Debt is another issue to highlight. Long-term debt makes up roughly 25% of Alliance's capital structure, a modest level for just about any company. And that's roughly normal for this conservatively run partnership, which didn't have to restructure any loans during the coal industry downturn. Low debt and plenty of distribution coverage make the 8%-plus distribution yield looks pretty solid. 

An easy choice

For the vast majority of investors, Alliance Resource Partners should be the choice here. Yes, Foresight Energy might have more upside potential. But that assumes that its continuing efforts to work back from a debt overhang that necessitated a financial restructuring go as planned. Another downdraft in the coal industry could easily turn that into a losing bet. And with no distribution, all of your return is tied to a unit-price recovery.

Alliance, on the other hand, has proven it can handle a deep industry downturn. And while it may not be as exciting an investment as Foresight, Alliance's well-covered 8% distribution yield is a pleasingly boring way to make plenty of money while you wait for the thermal coal market to recover.