Image source: Alliance Resource Partners.
So far in 2015, pretty much all the media attention for the energy space has gone to the decline in oil prices. If you want to see an industry that is suffering even more than oil, though, you need to look at coal. So far this year, we have seen one of the three largest U.S. coal producers file Chapter 11 bankruptcy and a few others appear to be close to collapse themselves. Despite this extremely challenging market, however, one company has been able to perform well: Alliance Resource Partners .
One thing that investors could point to as a sign of success is how management has handled the company over the years. With that in mind, it's probably worth paying attention when management has something to say about the business or the coal market. So here are five key quotes from Alliance management and that of its general partner, Alliance Holdings GP , on its most recent conference call.
Unclear marketThere is only one certainty in the coal market right now, and it is that is completely uncertain. Continued pressure from cheap natural gas has kept demand and, in turn, prices low. At the same time, though, there are a slew of miners that have either gone bankrupt or are on the brink that could bring a bit of supply out of the market. Because of this, Alliance's management is taking a wait-and-see approach before giving any sort of outlook in terms of production.
According toCEO Joseph Craft:
Taking a cautious approachFor a company to pay such a generous distribution like Alliance, there needs to be some clarity when it comes to cash flows. Since the company said it doesn't have the clarity it wants, it has decided to not commit to any increased outflows in spending, including any increases to its distribution. As Craft said:
The company's payout isn't in any for sort of danger right now. Its distribution coverage ratio for the most recent quarter was 1.66 times, which means there is more than enough cash coming in the door to pay the distribution and have some left over to reinvest in the business. This appears to be a very cautious move, which, considering the state of the coal market, is a smart thing to do.
Diversifying from coalOne thing that has hurt so many other coal companies was that they didn't diversify their revenue streams when they had the financial flexibility to do so. Alliance doesn't want to make that same mistake, so according CFO Brian Cantrell, the company is stepping up its investments outside the coal space:
Let's be clear here: $150 million in oil and gas investments isn't that much compared to the $2.3 billion in coal revenue it pulled in over the past 12 months. This isn't a game-changing sort of investment in and of itself, but if management were to continue to build a position in other oil and gas mineral rights over the next couple of years, it could become something noteworthy.
Finding more ways to cut costsAlliance has been one of the lower-cost producers in the coal industry for some time now, which has allowed it to be profitable and grow market share while so many others have been floundering. While the location of its assets has been a major advantage, another has been management's moves to control costs. With so many other companies struggling and shuttering mines, Alliance is using it as an opportunity to buy mining equipment on the cheap. As Craft pointed out:
This is one of those clever things a company can do for a time, but they aren't exactly permanent savings the company can realize year in, year out. Eventually, Alliance will need to spring for new equipment, but hopefully the market will have improved by then.
Will take advantage of other companies' weaknessThe market for coal, like those of every other commodity, is cyclical. Sure, there is a lot of pressure on demand, but that just means there will need to be a supply response. When that does happen, Alliance's management sees a time where it can capture even greater market share while others try to recover from their bloated balance sheets. According to Craft:
Coal may not be the dominant energy supplier it once was, and the argument can be made that we are in a time where coal demand is in structural and perpetual decline. However, that is still a ways off, and the weakness of so many other coal companies today gives Alliance plenty of room to be a growing, profitable company for a few years to come.
The article What Alliance Resource's Management Thinks You Should Know About the Coal Market originally appeared on Fool.com.
Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool. 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.
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