The units of coal-focused master limited partnership Alliance Resource Partners (ARLP -0.62%) were cut in half in March, falling 54% according to data from S&P Global Market Intelligence. The truth is, the decline in March wasn't particularly surprising, as the units have been steadily falling for more than a year. In fact, over the last 12 months they have lost a massive 86% of their value.
A couple of problems are hitting Alliance Resource Partners today. The first is that environmental concerns have been growing for years and that's led coal, one of the dirtiest fossil fuels, to be increasingly replaced by other options. Although ESG investors might think that means solar and wind, the truth is that natural gas has been coal's biggest threat. That's more of an economic thing than a clean energy thing, though, because a massive increase in natural gas production in the United States has pushed the price of this fuel to historic lows. Yes, it burns cleaner than coal, but the big story for utilities (which are the primary customers for Alliance's coal), is that it's cheaper to build and operate a natural-gas-fired power plant than one that uses coal.
Demand for coal from foreign markets helped to offset the hit to domestic demand for a bit, but a general economic slowdown overseas led that demand to dry up. So Alliance's financial results in its coal division haven't been great lately. In fact, when it reported earnings in late January, it cut its distribution to $0.40 a unit from $0.54 the previous quarter. That wasn't a welcome development and highlighted the problems the partnership was facing. Management has been trying to expand into natural gas, but that process hasn't been quick enough to offset the drop-off in the coal business.
And then there was the double whammy of COVID-19 and a price war between OPEC and Russia. The end result is that demand for energy could fall off in the near term, and natural gas is trading at astoundingly cheap levels because there is more supply than demand. In fact, in many regions natural gas is cheaper per unit of energy produced than coal. (Normally gas wins out because of the costs associated with building a power plant, not on fuel costs alone.) With that backdrop, coal's future looks even more uncertain than it did just a month ago. And then there's the problem with sending miners into a confined space, which is not very good for the social distancing that the U.S. government is asking of citizens. In response, at the end of March, Alliance announced that it was curtailing production and suspending its distribution. From bad to worse for investors -- no wonder Alliance's units took such a hit.
Alliance is actually a very well-run coal producer. You can think of it as the cleanest dirty shirt in a troubled industry. At this point, however, only the most aggressive investors should be looking at this coal miner, and even they should probably stay on the sidelines right now.