Units of master limited partnership Alliance Resource Partners (ARLP 1.85%) fell 25% in February, according to data from S&P Global Market Intelligence. They were down by around 37% in the first two months of 2020. That's much worse than the around 8% decline in the S&P 500 Index across January and February. So while February's COVID-19-led market swoon was a problem for this coal miner, it really isn't the main driver of its troubles today.
Alliance Resource Partners is a coal miner. It's fairly well positioned relative to its peers, with mines largely located in a desirable coal region, but the longer-term trend is definitely for less coal demand. This touches on the ESG-favored push for renewable power, but it's really more about money. With natural gas so cheap, it is just less expensive for utilities to switch to natural-gas-fired power plants.
This isn't a new trend; it has been going on for many years at this point. Alliance Resource has managed through this period relatively well, noting that many of its peers were forced to take a trip through bankruptcy court. However, it hasn't been easy, and it looks like it's getting harder. The drop in energy prices driven by concerns about COVID-19 aren't helping, since low natural gas prices are a key headwind to coal demand. But the problems Alliance Resource is facing aren't really coronavirus issues.
And the partnership's fourth-quarter 2019 earnings release, issued in late January, did little to please investors. Perhaps most notable was Alliance Resource Partners' decision to cut its distribution by 25%. Essentially, management believes that 2020 will be a difficult year, and it is taking a proactive step to ensure it remains a financially strong coal miner. It's the right move, but investors took the hint and sold the units.
That said, COVID-19 will complicate things in the near term. That's because Alliance has been using its coal business to expand into the natural gas space. Although natural gas made up only about 7% of revenues in 2019, low energy prices could get worse if the coronavirus leads to a recession-led demand slump. Further, exports have been an integral part of Alliance's coal business of late. They weren't as strong as expected in 2019 and could get worse in 2020 if the coronavirus stifles global electricity demand.
If you are looking for a coal miner, Alliance Resource Partners is probably one of the best options. However, that doesn't change the bigger picture here: Coal is being displaced by other energy sources. Alliance is working to change with the times, but it is a slow process, and more volatility, including some driven by COVID-19, is likely for the foreseeable future. This high-yield partnership isn't for the faint of heart.