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Why Alliance Resource Partners' Earnings Growth Isn't Good News

By John Bromels - Jan 29, 2020 at 6:38AM

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This top coal miner's business is booming...in every area but coal.

The coal industry is in big trouble, but you might not know it by looking at coal miner Alliance Resource Partners' (ARLP -0.81%) 2019 earnings, which were released on Jan. 27. Its marquee number -- net income for the fiscal year -- was up 8.9% over the prior year. Other annual earnings numbers were similarly positive.

The quarterly numbers, on the other hand, weren't anywhere near as impressive. And there was another major piece of bad news for investors that prompted a sell-off. Here's what you need to know.

A pile of coal with conveyor belts in the background

The coal industry, once the top source for electricity in the U.S., has fallen on hard times. Image source: Getty Images.

The raw numbers

Alliance's annual figures seemed pretty good:

Metric 2019 Annual 2018 Annual % Change (YOY*)
Revenue $1.96 billion $2.0 billion (2%)
Net Income $399.4 million $366.6 8.9%
Adjusted EBITDA $599.0 million $647.4 million (7.5%)
Earnings Per Unit (diluted) $3.07 $2.74 12%

Data source: Alliance Resource Partners Earnings Press Release. "YOY" = Year Over Year. Chart by author.

The Q4 numbers, well, didn't:

Metric Q4 2019 Q3 2019 Q4 2018 % Change (YOY*)
Revenue $453.3 million $464.7 million $531.8 million (14.8%)
Net Income $25.8 million $39.1 million $50.8 million (49.2%)
Earnings Per Unit (diluted) $0.20 $0.30 $0.38 (47.4%)
Coal Production (tons) 8,551 10,071 10,196 (16.1%)

Data source: Alliance Resource Partners Earnings Press Releases. "YOY" = Year Over Year. Chart by author.

A downhill (coal) chute

The reason Alliance's 2019 annual figures look so much better than its Q4 figures aren't because of a blip in Q4, but because of deteriorating conditions within the coal industry.

Alliance started off 2019 in pretty good shape. It was coming off a year (2018) in which its coal production had increased by 7.1%, and it had posted record sales volumes and consistently improving financials. In Q1 2019, the trend seemed to continue, with a 15% year-over-year increase in revenue and a 27.1% year-over-year increase in net income, excluding the effect of a major acquisition.

After that, as CEO Joseph Craft explained in a press release, things took a turn for the worse:

"Unfortunately, the price for thermal coal in the international marketplace continued to deteriorate throughout the year... . As a result, export volumes shrank and the industry soon faced a growing oversupply in the domestic market. [We] proactively responded by modifying our operations to shift production to our lowest-cost mines, reducing total volumes, [and] adjusting our coal sales mix to increase domestic market share in the face of weak export pricing."

Unfortunately, even those corrective actions weren't enough to keep the wolf from the door. Management's 2020 guidance calls for a revenue decrease of between 10% and 16% and a huge EBITDA reduction of between 28% and 39%.

As a result, Craft announced on the Q4 earnings call that the company was cutting its quarterly distribution from $0.54/unit to $0.40/unit. Even after this cut, the current yield is about 16.8%, which is very high even for a master limited partnership (MLP), which often sports high yields. This reflects investors' skepticism about the long-term prospects of the company.

The one bright spot

Perhaps the only silver lining for Alliance was its "minerals" segment, which refers to its oil and gas investments. This business saw big growth in 2019, relative to the rest of the company. While some of that growth was due to acquisitions, organic year-over-year EBITDA growth in the segment was 120.7%, to $47.0 million.

Of course, the company's total 2019 Adjusted EBITDA was $599 million. That means its minerals segment is responsible for less than 10% of total Adjusted EBITDA. It's also worth noting that EBITDA strips out depreciation and amortization expenses, which were substantial in the minerals segment. So substantial, in fact, that once the $309.1 million of segment depreciation, depletion and amortization expenses are factored in, the segment actually posted a net loss in 2019.

Plus, when a coal company's brightest spot is its oil and gas business, that tells you pretty much all you need to know about how the company is faring.

Investor takeaway

Alliance's poor performance in the latter half of 2019 isn't really the company's fault. Coal-fired power capacity has been declining in the U.S. and globally since 2011, as cheaper, cleaner-burning, and easier-to-transport natural gas has become more abundant. Renewables, especially wind, are also gaining market share. Unfortunately, there's little Alliance can do to stop this long-term trend in the energy industry.

While investors might be tempted by Alliance's still-high yield, it's worth noting that this is the company's second distribution cut in less than five years, and its share price has fallen 77% during that time. With management predicting even worse results in 2020, investors should look past the company's 2019 improvement in net income. You'll almost certainly want to steer clear.

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Stocks Mentioned

Alliance Resource Partners, L.P. Stock Quote
Alliance Resource Partners, L.P.
ARLP
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