Alliance Resource Partners LP (NASDAQ: ARLP) is one of the cleanest shirts in the dirtly laundry pile that is the coal industry. CONSOL Energy (NYSE: CNX) saw the writing on the coal mine wall early and has been working to shift its business mix toward natural gas. The big difference between Alliance and CONSOL really boils down to the future of power.
CONSOL Energy was once one of the largest coal miners in the United States, pulling up thermal and metallurgical coal. However, around 2010 the company made an important shift toward natural gas when it bought drilling assets from Dominion Resources. It was a roughly $3.5 billion deal that coincided with ExxonMobil's decision to buy XTO Energy so the oil giant could expand in the natural gas space.
Since natural gas prices have been relatively weak for years, you could argue that both ExxonMobil and CONSOL overpaid. However, what this deal did for CONSOL was fundamental -- it allowed it to shift away from coal. For example, it sold roughly half of it coal business to Murray Energy in 2013 and set up CNX Coal Resources LP (CCR) in mid-2015 to jettison more coal mines, while still controlling them and benefiting from them financially. CONSOL is CNX's sponsor and general partner.
While coal is still about half of CONSOL's business, it is clearly shifting gears. Note that it just sold another coal mine in February. So, in large part, CONSOL is going from a coal miner with some gas assets to a natural gas company with some coal assets. If you think coal is headed for the dustbin of history, CONSOL is probably a better option than Alliance, which is still just a coal miner. But that's a big-picture view of things.
Who's got the money?
Coal still makes up about a third of the power produced in this country and is expected to remain an important part of the grid for many years into the future. In fact, part of the reason that coal pricing has been so weak is actually because natural gas has been so cheap in recent years. Essentially, utilities have been killing two birds with one stone, switching to cheap natural gas, which also happens to be cleaner burning than coal, helping out on the carbon emissions side of things.
But here's the problem for CONSOL: Cheap gas has wreaked havoc on the company's top and bottom lines. In 2010, CONSOL pulled in over $5 billion in revenues and earned roughly $1.60 a share. Last year, CONSOL's revenues were around $3 billion and it lost $1.60 a share. (Its natural gas revenues fell roughly 30% while coal revenues fell "just" 20%.) Its dividend is now just a token penny a share. In other words, CONSOL isn't a play for today; it's a play on a future that's more focused on gas.
Alliance, meanwhile, is all about coal. But it's about Illinois Basin coal, one of the most desirable types of coal in the country for power generation. How desirable? For years, while other coal miners suffered from falling sales and weak prices, Alliance was able to increase production enough to keep its top line growing despite moribund coal prices. Essentially, its Illinois Basin focus was allowing it to steal market share from competitors in other coal regions.
That's why, until late last year, Alliance was able to keep increasing its distribution when competitors were careening toward bankruptcy, like Arch Coal and Alpha Natural Resources, among others. But even Alliance couldn't outrun the coal market forever, and in the third quarter of 2015 it stopped increasing its distribution. Then, when it announced full-year 2015 earnings, it explained that it, too, would have to look at cutting back on production. No wonder the shares are off some 75% from their peak.
Alliance, however, is still one of the best positioned coal companies around. And despite the change of fortunes, it expects to be able to cover its 2016 distribution by 1.1 times. Assuming that proves true, the company's massive 23% yield would be an income investor's dream come true. Remembering, of course, that coal, while dirty and out of favor, is still expected to make up around a third of the power pie in 2040, according to the U.S. Energy Information Administration. If Alliance can simply maintain its share in the coal market, it will be able to throw a meaningful amount of cash off for another 20 years, even if the distribution doesn't hold at current levels.
Which way to go?
So CONSOL or Alliance is a tough call. For those looking to the long term, and not interested in dividends, CONSOL's shift toward natural gas is probably the best option. Only don't expect much from the investment in the near term, since gas prices remain weak and there's no dividend to speak of.
For those with a contrarian bent, however, out-of-favor Alliance still has a solid business, and coal doesn't look like it's going away -- at least not yet, anyway. That could make Alliance and its 20%-plus distribution yield an enticing bet, but only if you're willing to go against the grain. That said, Alliance is putting money in your pocket today, CONSOL isn't.