Shares of Alliance Resource Partners (NASDAQ:ARLP) fell nearly 14% today after the company outlined steps it has taken or will take to position itself in the current environment. Energy demand and prices have cratered in response to the coronavirus pandemic and a crude-oil price war between Saudi Arabia and Russia.
That has forced the partnership to make significant changes to operations for the remainder of 2020. Alliance Resource Partners has withdrawn full-year 2020 financial guidance and will significantly reduce coal production and overall costs. The partnership has also suspended its cash distribution.
As of 12:15 p.m. EDT, the small-cap stock had settled to a 10.3% loss.
The distribution yield on units of Alliance has topped 30% in recent weeks as the stock fell in the broader market volatility. That was perhaps the strongest argument for owning the company, so it's not too surprising the stock is tumbling on news that the distribution has been temporarily suspended.
The partnership said it will now seek to match full-year 2020 coal production with sales commitments, which total 28 million tons. That's a significant reduction from initial full-year 2020 production guidance of about 36.5 million tons.
Alliance Resource Partners reassured investors that nearly 75% of domestic sales are to states that rely on coal-fired power plants for the majority of their electricity production. But that might not be too reassuring.
In 2019, American coal-fired power plants generated the lowest amount of electricity since the late 1970s. In January 2020, a mild winter resulted in a 35% drop in electrical output from the nation's coal fleet compared with the year-ago period, according to data compiled by the U.S. Energy Information Administration. Natural gas, nuclear, wind, and solar all gained market share in that period.
Despite the company's reliance on coal, Alliance Resource Partners was comfortably profitable and generating healthy cash flows before the recent energy market volatility. That strongly suggests the distribution will be reinstated eventually, although investors have no way of knowing how long the ensuing global recession will last.