What: Alliance Resource Partners L.P. (NASDAQ:ARLP) units dropped almost 26% last month, and Alliance Holdings GP, L.P. (NASDAQ:AHGP) fell nearly 22%. Both are off roughly 80% from their mid-2014 peaks. And it doesn't look like anything is getting better.
So what: Last year was a turning point for Alliance Resource Partners. For a long time it was able to increase coal volumes enough to grow its top and bottom lines despite weak coal prices. Essentially, it was taking market share from competitors because the Illinois Basin coal it produces was in high demand. But as 2015 wore on, it became increasingly clear that falling coal prices and weakening demand, as the utility industry shifts toward natural gas and renewable power, were catching up to Alliance.
In fact, as the year drew to a close, the company stopped increasing its distribution on a quarterly basis. And at the end of January it reported weak full-year results and said that 2016 is going to be a difficult year, at best. For example, Alliance is even starting to trim production. After years of the company outdistancing peers, the coal industry downturn has finally caught up to Alliance, and investors are jumping ship.
That helps explain why Alliance Resource Partners is in the dumps. Alliance Holdings GP has followed along because it basically runs Alliance Resource Partners. It gets paid a management fee for doing that, but the real payoff for the GP comes from an increasing distribution at Alliance Resource Partners because that leads to incentive payments for the GP. So, with Alliance Resource Partners' distribution in neutral, Alliance Holdings GP's growth is in neutral, too.
Now what: Both Alliance Resource Partners and Alliance Holdings are well-run businesses in a deeply out-of-favor industry. They are among the cleanest dirty shirts, if you will. However, that doesn't change the fact that the coal industry is facing a severe crisis. And with each distribution yielding well above 20%, the risks here are obviously huge. Most investors would be better off avoiding this pair. That said, if you're a contrarian investor, you might find the duo an interesting way to play the moribund coal market. Just don't lose sight of the risks.