Units of Alliance Resource Partners (NASDAQ:ARLP) fell over 13% today as stock markets declined on worries over the pace of an economic recovery. Yesterday, the Fed provided its first economic projections since December. The nation's top economists currently expect unemployment to remain elevated through the end of 2021, and the evolving nature of the coronavirus pandemic will negatively impact the economy for years.
Considering Wall Street had already been penciling in a relatively optimistic recovery scenario -- an economic rut that was deep, but brief -- the Fed's comments are forcing analysts and investors to reconsider that assumption. Energy markets are especially volatile, which isn't too surprising considering they're driven by economic and consumption growth.
As of 3:24 p.m. EDT, the dividend stock had settled to a 7.6% loss.
Units of Alliance Resource Partners have been hit particularly hard during the ongoing economic uncertainty. The coal producer was forced to slash production targets, suspend distribution payments, and commence other cost-saving activities. Management did the right thing, but investors have to consider the long-term effects of the coronavirus pandemic on the business.
For instance, coal-fired power plants in the United States were already rapidly losing market share to natural gas-fired power plants, onshore wind, and (to a lesser but growing extent) utility-scale solar. Natural gas prices pegged at 20-year lows, and mild winters made coal largely uncompetitive before the health crisis struck.
In the first quarter of 2020, power generators idled coal-fired power plants at a record rate. The nation's fleet sported a utilization rate of only 33% -- the lowest ever. In fact, onshore wind farms -- an intermittent power source at the mercy of nature -- had a higher utilization rate in that span.
The situation is much worse now. The United States is expected to consume 5.7% less electricity in 2020 than in 2019, which is a record drop equivalent to shutting off the country's power for 21 days. Almost all of the decline will be shouldered by coal-fired power plants. As of early June, the U.S. Energy Information Administration (EIA) expects coal-fired power plants to generate 33% less electricity in 2020 compared to last year. By contrast, electricity generation from natural gas and renewables is expected to grow.
Alliance Resource Partners needs to desperately overhaul operations to decrease its dependence on coal, but a slowing economy is accelerating the energy transition to cleaner power sources. In other words, the coronavirus pandemic is compressing the time in which the company has to act while simultaneously restricting its financial flexibility.
Therefore, if the ensuing economic recovery takes longer than Wall Street currently expects, then investors can expect units of Alliance Resource Partners to struggle. Given the unprecedented reduction in coal-fired power plant output, it might even pose an existential crisis for the business.