A Stronger Coal Market Fuels Alliance Resource Partners, L.P. Earnings

By Markets Fool.com

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The coal market started to show some signs of life during the third quarter, which was welcome news for coal MLP Alliance Resource Partners (NASDAQ: ARLP) and its general partner Alliance Holdings GP (NASDAQ: AHGP). In fact, Alliance delivered record coal sales as it started unloading inventory, which fueled a significant sequential improvement in revenue and cash flow. However, the results did trail the prior period of 2015 and are not sustainable unless the company secures more coal contracts and restarts some of its idled production. That said, the partnership continues to make progress on securing additional contracts, which are providing greater revenue visibility through 2020.

Alliance Resource Partners results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$552.1 million

$566.4 million

(2.5%)

Distributable cash flow

$128.9 million

$139.0 million

(7.3%)

Distribution coverage ratio

2.43

1.58

53.8%

Data source: Alliance Resource Partners.

What happened with Alliance Resource Partners this quarter?

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Alliance Resource Partners is cashing in on its coal inventories.

  • While coal sales revenue slumped year over year, the partnership saw a sharp spike in revenue over the second quarter. Overall, revenue was up 25.7% due to increasing coal sales volumes, which rose to a quarterly record of 10.8 million tons and is up 4.5% from the year-ago period and 35.1% from last quarter.
  • That said, coal production during the quarter slumped 25.7% year over year to 8.5 million tons due to the idling of several mines and reduced output at others. Alliance Resource Partners made up the difference between production and sales volume by selling coal from its inventory.
  • Coal prices were also lower, falling 6.7% year over year and 6.4% sequentially.
  • Distributable cash flow followed revenue, slumping year over year but rising 5.5% sequentially.
  • This sequential increase in cash flow boosted the Alliance Resource Partners' distribution coverage ratio, giving it the confidence to maintain its payout.
  • Because of that, its general partner Alliance Holdings GP was also able to maintain its quarterly distribution.

What management had to say

CEO Joseph Craft commented on the quarter:

ARLP continued to perform well in the 2016 Quarter and slightly better than our expectations. Record sales volumes allowed us to significantly reduce coal inventories and, along with ongoing cost containment efforts, led to increased net income and EBITDA. We also continued to strengthen our contract portfolio during the 2016 Quarter, taking advantage of improving market conditions to secure coal sales agreements for the delivery of an additional 11.2 million tons through 2020. ARLP's distributable cash flow also increased in the 2016 Quarter, improving 5.5% sequentially lifting our distribution coverage ratio to 2.43 times.

The primary driver of Alliance's strong showing was its decision to monetize some of its inventory. During the quarter, it sold 2.2 million tons out of its inventory, leaving it with 2 million tons of inventory as of the end of last quarter. That is noteworthy because it means that the partnership can not keep up its current sales pace given the current production rate.

In addition to cleaning out half of its inventory, Alliance was also able to secure additional contracts for future deliveries. It now has secured sales commitments for 29.1 million tons in 2017, 17.4 million tons in 2018, and 8.9 million tons in 2019. That is up from 24.3 million tons, 15.0 million tons and 7.9 million tons in 2017, 2018 and 2019, respectively, as of the end of last quarter. That said, Alliance Resource Partners' secured 2017 volumes are below the 36.5 to 37 million tons of coal it expects to sell this year.

Looking forward

Despite the current shortfall between its 2016 coal sales volume and its 2017 secured contracts, Alliance Resource Partners is optimistic about what lies ahead. Craft said:

Strong summer coal burn, favorable natural gas prices and reduced coal inventories, for both utilities and producers, all contributed to improved supply/demand fundamentals during the 2016 Quarter. Several factors have also recently contributed to an improvement in seaborne markets, creating attractive opportunities for the export of U.S. coals. ARLP is participating in this rally by opportunistically contracting for the export of 3.0 million tons to be shipped over the next six months. Assuming a normal winter heating season, market conditions appear favorable through the end of the year and we expect our fourth quarter coal sales to be comparable to the quarter's record volume. Looking to 2017 and beyond, we anticipate a recovery in the domestic thermal coal markets as higher natural gas prices spur increased demand for coal and supply is reduced by increased shipments of U.S. coal into the export markets. We remain convinced that our strategically located, low-cost operations, conservative balance sheet and consistently strong performance have ARLP well positioned to benefit from an improved market environment.

Alliance Resource Partners clearly believes that the worst is over for the coal market and that its results should follow the market higher.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.