Forget about earnings. Forget about revenues. Alliance Resource Partners (NASDAQ:ARLP) cut its distribution 35% as it announced first-quarter results. This is the headline that's likely to move the needle in the stock market. But you really can't forget earnings and revenues, and you need to look under the covers to see how things are really going before you make a split judgment. Here's what you need to know about Alliance's first quarter.
The big number
When Alliance reported 2015 earnings, it explained that it expected to cover the distribution with distributable cash flow by 1.1 times in 2016. That was just three months ago. As the company reports first-quarter results, and a distribution cut, it makes sense to ask what changed. According to CEO Joseph Craft, not much: "ARLP's guidance for 2016 distributable cash flow has not changed from our year-end earnings release."
So what's different now than when the year started out? Alliance is worried about access to capital, since so many of its peers have cratered into bankruptcy. Essentially, according to the CEO, "In the current capital market environment, it has become clear that we must be proactive in preserving liquidity in order to maintain access to capital." While that may not feel like a great answer if your distribution check just got hacked, liquidity is really an important issue and banks are rightly concerned about the well being of coal miners, even well-run ones like Alliance.
Some other numbers
To put some numbers on that, Alliance's net income in the first quarter was $0.26 a unit, down from last year's $0.92 and below analyst expectations for $0.47. That's clearly not a good thing, but it's actually quite impressive that the coal miner made money. In fact, the list of public competitors is increasingly short, so it's hard to pull up a comparable figure. It's enough to say that Alpha Natural Resources, Arch Coal, and Peabody Energy, three of the largest U.S. coal miners, have all been forced to seek out bankruptcy protection after hemorrhaging red ink. So Alliance's quarter was weak, but it's proving itself to be a survivor during what is a deep and long downturn.
On the top line, Alliance had revenues of $412 million. That was lower than last year's $560 million and below the average analyst call for around $470 million. The big issue, however, wasn't coal pricing, which fell only around 1% or so year over year. In fact, coal prices were up 2% from the fourth quarter. The real problem was that Alliance sold less coal. Volume declined nearly 22% year over year and about 25% sequentially from the fourth quarter.
To be fair, that wasn't an unexpected outcome. At the end of last year, Alliance warned that it was finally being forced to trim production after years of increases, as its Illinois Basin coal stole market share from other coal regions.
Doing what it can
Those production cuts, however, were all part of a plan to right-size the business for today's market. For example, Alliance was able to trim its expenses by 24%. And that fell down to the company's cost per ton, which improved by 3.5% or so. Helping that along was the decision to close higher cost mines and shift production to lower cost operations. So Alliance is trying to control what it can despite the painful industry environment. Note that producing less from a mining operations often results in rising costs because of reduced utilization.
Doing what it can, unfortunately, also includes the distribution cut. Not to harp on this bit of news, but access to capital for a miner is vital to long-term survival. Put simply, it costs a lot of money to run a mine. If Alliance has to trim back the distribution to ensure that its banks don't jump ship, then it is, honestly, acting in the best interest of unitholders. Bad medicine to be sure, but necessary just the same.
There's no doubt that this was a rough quarter for Alliance unitholders. But take heart in knowing that the coal miner continues to perform relatively well despite all the headwinds it's facing. Indeed, for a contrarian investor looking for a coal play, Alliance is still one of the best options around.