Here's Why This is the Best Coal Stock to Buy... If There is One

While most other coal companies flounder, Alliance Resource Partners keeps racking up impressive growth and paying its investors a hefty distribution.

Bob Ciura
Bob Ciura
Apr 10, 2014 at 9:35AM
Energy, Materials, and Utilities

The publicly traded coal companies in the United States don't get much love. There are, of course many, reasons for this. Coal is under a great deal of political and public scrutiny in America. It's viewed as a dirty source of energy that represents the past much more so than the future. Its end users, such as electric utilities, have turned away from coal over the past year in favor of relatively cheaper and cleaner sources of energy such as natural gas.

Add it all up, and you'd be hard pressed finding a coal company worth investing in right now. Indeed, coal stocks such as Alpha Natural Resources (NASDAQOTH:ANRZQ) and Peabody Energy (NYSE:BTU) suffered last year and burned their investors. They're idling facilities and busily cutting costs in an attempt to keep profits afloat, which hasn't really worked.

One coal stock continues to buck the over-arching headwinds facing its industry. That's Alliance Resource Partners (NASDAQ:ARLP), a coal MLP that is still finding a way to grow.

Alliance Resource Partners sets records, quarter after quarter

It seems absurd to say that a coal company is currently setting quarterly records like clockwork, but that's exactly what Alliance Resource Partners is doing. Its momentum accelerated as 2013 drew to a close, even as other coal producers were brought to their knees. For the year, Alliance Resource generated record revenue, coal sales volumes, earnings before interest, taxes, depreciation, and amortization (EBITDA), and profits. Its profits jumped 17% last year, on the back of 8% revenue growth.

This is while other coal stocks are struggling just to break even. Peabody Energy's EBITDA fell by nearly half last year. The primary culprit for its struggles was poor coal pricing which led to severely deteriorated margins. Shipments and tons sold increased slightly last year, but a 21% drop in Peabody's Australian coal margins took its toll.

Likewise, Alpha Natural Resources' revenue dropped by 28% last year, and its adjusted EBITDA fell 62%. The company faced the double-whammy of lower volumes and collapsing sales prices. Its shipments fell 20% last year, driven mostly by Eastern steam coal. Alpha Natural's other major area of production, metallurgical coal, remained steady. Overall, the spread between its realized selling price and cost per ton fell by seven percentage points, from 16% in 2012 to 9% last year, which dragged down profits.

Alliance Resource's industry outperformance is due largely to fortunate geographic positioning. Its mines are strategically located close to its end users. That way, it's able to produce and market its coal at a much lower cost than many other coal miners. Of its 11 underground mines, almost all of them are positioned near their utility customers. This results in a steadier and more consistent stream of business, evident by the fact that the vast majority of Alliance's 2014 sales volumes are already priced and under contract.

How Alliance Resource's investors profit
Alliance Resource has another leg up on the competition because of its tax structure. Due to its classification as a Master Limited Partnership, it enjoys a favorable tax structure and in turn is required to distribute the bulk of its cash flow to investors. That means ordinary investors win big by receiving a huge yield. Alliance Resource yields roughly 5.5% annualized.

And, even better, Alliance is able to increase its distribution regularly thanks to its operational success. Consider that Alliance Resource has increased its distribution for 23 consecutive quarters.

Why plenty of growth may be in store
Demand for coal in the United States has ebbed over the past couple of years, due to increasing political and public scrutiny. That makes it unlikely that many new coal-fired plants will be built in America any time soon. Utilities are increasingly turning to natural gas, which is cleaner and involves less detrimental effects to the environment.

This climate was borne out in the results of several coal stocks over the past year, such as Alpha Natural Resources and Peabody Energy. However, Alliance Resources thrived through this time. It's still managing to set new records with each passing quarter, thanks to its strict cost focus. It's doing so well even in such a tough operating climate, just imagine how well it can do if coal sees even a slight recovery in demand.