Alliance Resource Partners (ARLP -0.05%) has a truly amazing ability to defy the series of woes facing its industry. Coal is under severe pressure in the United States. For most of the year, natural gas prices were at depressed levels which caused major industrial buyers of coal, including utilities, to begin switching from coal to natural gas. As a result, earnings have been walloped across the entire coal sector, but somehow, Alliance Resource Partners seems immune to the carnage.
Investors may be rightly asking how a company can succeed in light of such troubling issues facing coal. When it comes to Alliance Resource Partners, its talented management team and diversified operations are the primary reasons for the company's excellent results.
Key trends remain favorable
Alliance Resource has an excellent track record of securing future contracts, without having to endure severely lower prices in order to move inventory. Consider that Alliance Resource is fully priced and contracted for 2013 and next year, and its 2014 and 2015 contracts are more than 90% priced. This stability has allowed Alliance Resource to realize 12 consecutive years of record results. Tons produced and tons sold are up this year, which should generate at least 6% revenue growth this year.
Alliance Resource Partners is focused on Midwestern and Northern Appalachian coal, which are seeing great results. Alliance Resource Partners has 11 existing mines in these regions, which are producing strongly, and the company has plans for one additional mine under construction as well as two mining development projects under way. In fact, these regions are producing low-cost coal to such a degree that Alliance Resource Partners isn't threatened by natural gas. The current natural gas curve actually favors Illinois and Northern Appalachian coal, according to the company. This is not to be confused with the Central Appalachian coal that has seen its fair share of trouble this year.
Other coal producers are falling behind
Meanwhile, lower shipments and prices are afflicting the entire coal industry. Peabody Energy (BTU) saw its adjusted earnings drop more than 80% through the first nine months of 2013. Its future outlook doesn't offer much hope, either: Peabody expects continued deterioration of its business. Management warns investors that its coal revenues per ton will decline as much as 10% for 2013, and full-year earnings per share will likely fall more than 50% from 2012.
It's a similar story for coal producer Alpha Natural Resources (NYSE: ANR), whose results have collapsed throughout 2013. Through the first nine months of the year, Alpha Natural's coal shipments are down 20%. It's also realizing significantly lower prices. Over the first three quarters, Alpha Natural's coal margin has dropped by half.
It seems that Alpha Natural's product focus is contributing to its problems. While metallurgical coal is resilient, Eastern steam coal is really suffering. Alpha Natural's shipments of Eastern steam coal dropped 31% in the most recent quarter. Business isn't expected to improve any time soon, either. Alpha Natural's outlook calls for shipments to fall again in 2014.
To try to help weather the storm, the coal industry is turning to aggressive cost cuts. Alpha Natural has targeted $200 million in annual expense reductions, driven by streamlining field operations and corporate functions. In addition, Alpha Natural will taper off its capital expenditures to improve profitability. Capital expenditures totaled nearly $500 million last year, but that figure will fall to as little as $260 million this year and $250 million next year.
Best of all: Alliance Resource Partners' distribution
Because of Alliance Resource Partners' status as a master limited partnership, it's required to distribute the majority of its cash flow through to investors. This means investors who like to receive income from their investments will really appreciate Alliance Resource Partners. It has grown its distribution for 22 consecutive quarters and provides a compelling 6% yield.
In closing, while many other coal companies are resorting to expense reductions to keep current profits afloat, those initiatives are coming at a severe cost to future growth. No such sacrifice is necessary for Alliance Resource Partners, which is reporting record results quarter after quarter. Moreover, its huge distribution, which the company is committed to growing every quarter, is simply icing on the cake. Not all coal companies are suffering, and for evidence of that, look no further than Alliance Resource Partners.
