The market currently loves dividends and hates coal stocks, leaving Alliance Resource Partners, L.P. (ARLP) in a tug of war among most investors. The coal MLP currently yields nearly 7%, though investors can't stand anything related to coal.
The company engages in the production and marketing of coal primarily to utilities and industrial users in the United States. It operates 11 underground mining complexes in the Illinois Basin, Central Appalachian, and Northern Appalachian regions. It is first and the largest MLP in the coal sector.
While other coal stocks were destroyed during the Great Recession, Alliance Resource Partners only saw a minor dip in profits. In general, the coal sector was crushed by waning demand from China and domestic utilities switching to over-supplied natural gas after that fuel plunged. The overall demand for coal dramatically dropped due to those two reasons.
Record Sales During Q3
Amazingly, the company was able to report record sales during Q3, even with the unplanned idling of the Pontiki mine. On top of the record sales numbers, the company has development projects at Gibson South and White Oak in the Illinois Basin. The new Tunnel Ridge mine in the Northern Appalachia contributed 500K tons more than the preceding quarter. It will produce approximately 5.8M tons in 2013, and reach full capacity in 2014 at 6.6M tons. These new projects will contribute to significant growth in the next few years.
The company sold 8.9M tons in Q312 compared to 8.7M in Q212 and 8.3M Q311. Total produced tons hit 9M compared to only 7.6M last year. Coal sales hit nearly $500M compared to $474M last year. All numbers were records in a time period where other coal producers were cutting production.
Impressive results, considering the coal producers have cut around 100M tons of production since the current down cycle started at the end of 2011. Arch Coal (ACI), Alpha Natural Resources (ANR), and Peabody Energy (BTU) all announced production cuts of over 20M tons.
The company is well positioned in the Illinois Basin, which provides a competitive price advantage to more costly production in the Central Appalachia. Over 80% of 2012 revenues will come from that region, with only 5% in the disadvantaged Central Appalachia.
According to a recent company presentation, the EIA expects Illinois Basin and Northern Appalachia production to increase, to the detriment of the Central Appalachia.
As the EIA reported on 2012, the major factor in the switch to Illinois Basin coal has the been the advancement of electric utility scrubbers to meet EPA regulations. These new scrubbers allow utilities to utilize the low-cost, but high-sulfur coal. Ironically, the coal has become more competitive versus the low-sulfur coal in the Central Appalachia that costs more to produce.
Unit Distribution History
The quarterly distribution increases speak for themselves. As the below table shows, the company has increased distributions over the last 5 years from $0.585 starting in 2008 to $1.085 to end 2012.
The bad news is that the stock has been flat to down for the last 2 years. The good news is that the stock has been flat to down the last 2 years. The coal sector has generally been crushed with few exceptions other than Alliance Resources, so the flat results aren't too bad. Over the last 5 years, though, the stock has had an impressive 162% gain.
The following chart compares the stock to the leading domestic coal producers. Alpha Natural Resources, Arch Coal, Peabody Energy, and CONSOL Energy (CNX) have all had horribly negative returns in that time period.
data by YCharts
Alliance Resources Partners remains a compelling investment, especially considering the current interest rate environment. Investors can purchase a growing coal producer with a strong yield approaching 7%, or stay in 10-year Treasury bonds sitting below 2%.
The contrarian investor might be skeptical of a stock that has outperformed the sector that dramatically in the last 5 years. A mean reversal suggests that Alpha Natural Resources or Peabody Energy might be the better play as China ramps up coal demand again, considering those companies focus more on exports. Regardless, investors can't argue with the fact that Alliance Resources has a compelling growth plan and yield.
Disclosure: I am long ANR.
Additional disclosure: Please consult your financial advisor before making any investment decisions.