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Is Alliance Resource Partners LP (ARLP) a Buy?

By Maxx Chatsko - May 19, 2018 at 4:34PM

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The coal stock pays a mind-bending 11.4% yield -- and it just raised guidance. Is it that simple?

Coal is in decline across the world -- despite the relatively rosy projections of the U.S. Energy Information Administration -- as nations move toward cleaner power sources such as wind and natural gas. But that hasn't stopped Alliance Resource Partners LP (ARLP -2.30%) from humming along as it pays unitholders an 11.4% yield. Management even raised guidance after a strong start to 2018.

Given all the gloom and doom surrounding the coal industry, investors may be wondering: How the heck is Alliance Resource Partners LP able to generate so much distributable cash flow? Well, it's pretty straightforward, actually. The company has low operating expenses, sunk costs in giant mining assets, and access to export terminals to sell into critical international markets for its metallurgical coal.

Will that always be the case? Is Alliance Resource Partners LP a buy for long-term investors?

A man staring at a drawing of several question marks with arrows drawn towards a light bulb.

Image source: Getty Images.

By the numbers

The business turned in a relatively solid performance in the opening frame of 2018. That allowed management to raise full-year 2018 guidance as follows:

  • Coal production in the range of 40 million metric tons (MT) to 41 million MT.
  • Coal sales in the range of 40.3 million MT to 41.3 million MT.
  • Coal revenue of $1.87 billion to $1.91 billion.
  • Net income of $405 million to $425 million.
  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) of $710 million to $730 million.

But "solid performance" is a relative term, especially when discussing the coal industry. The business performed worse than in the year-ago period nearly across the board. While some of that could be attributed to weather-related transportation disruptions in the first quarter of 2018, rising operating expenses and eroding selling prices played a bigger role.


Q1 2018

Q1 2017

Percentage Change

Coal revenue

$423 million

$438 million


Transportation revenue

$19.8 million

$9.60 million


Total revenue

$457 million

$461 million


Operating expenses

$277 million

$262 million


Net income

$156 million

$105 million


Cash flow from operations

$224 million

$177 million


Coal sold, MT

9.40 million

9.61 million


Average selling price, coal

$45.07 per MT

$45.65 per MT


Source: SEC filing.

Alliance Resource Partners LP managed to deliver a nearly 49% boost in net income compared to the prior-year period, but only after including an $80 million settlement gain. The company had been trying to settle a dispute with a customer since 2015 -- and finally received payment in March 2018. Back that payment out, however, and it's clear that the business is mired in a slow decline, much like the broader coal industry.

That explains management's diversification strategy. The company is working to leverage relatively healthy demand for American coal overseas by transporting as much of its own production as possible to export terminals. Transportation revenue grew at a healthy clip -- more than doubling from the year-ago period -- but still represented just 4% of total revenue during the most recent quarter. Put simply, transportation revenue alone won't be the company's savior.

The company and its subsidiaries have also acquired equity stakes in companies in the oil and gas industry. For instance, Alliance Resource Partners LP owns part of a private company called Kodiak, which provides gas-compression services to customers in the Permian Basin in West Texas. It's not directly related to the company's core business, nor is it geographically close to the company's operational footprint, but it provides additional income. Collectively, these investments are expected to provide between $25 million and $35 million in net income and EBITDA in 2018.

Of course, even these diversification efforts might only delay the inevitable.

A man holding coal in his orange-gloved hands.

Image source: Getty Images.

Minor technical detail

Although profitable, operations in the first quarter of 2018 clearly show a business in decline. The same trend is observed when zooming out and including results from recent periods. Total sales volumes have entered a slow decline over the years -- something that is likely to continue as coal prices continue to gradually slide. What's going on?

Unfortunately for Alliance Resource Partners LP and its unitholders, coal's decline isn't limited to American power-plant retirements. The very same markets it relies on -- namely, industrial uses of coal in China -- are turning over to natural gas. China is the fastest-growing importer of liquefied natural gas (LNG), and most of its consumption last year powered industrial activity. It's no coincidence that the shift away from coal and toward cleaner-burning LNG comes at the same time the country has taken a stricter environmental stance to limit air pollution.

Long story short, coal will suffer in the long run from increased LNG consumption around the globe -- and that could happen much sooner than many think is possible.

Two arrows, one point up and one pointing down, drawn on a chalkboard.

Image source: Getty Images.

This coal stock is not for long-term investors

I think global trends indicate that what appears to be a recovery for the coal industry will not be remembered as such. Rather, the current period likely will be looked back upon as one of the last hurrahs of a dying industry.

Coal is quickly being replaced by LNG and wind power in the very markets that domestic producers such as Alliance Resource Partners LP are relying on to carry their businesses. Therefore, despite the salivating double-digit yield on shares, this coal stock is not a buy, as the stock price is likely to continue sliding as Mr. Market adjusts the company's market valuation lower.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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