This Small Cap MLP Is Proving That Coal Isn't Dead After All

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 |  About: Alliance Resource Partners, L.P. (ARLP), Includes: ANRZQ, BTUUQ
by: Bob Ciura

Summary

Alliance Resource Partners has a low-cost structure and growing production.

This translates into a well-supported 5.2% yield.

Alliance Resource Partners has raised its distribution for 25 quarters in a row.

Over the past few years, coal has been absolutely buried in the financial media. Most investing commentary advises everyone to stay away from coal, no matter what. And, in some cases, that's good advice. Coal usage is on the decline due to rising regulatory and public scrutiny. Plus, due to the emergence of natural gas as a result of low natural gas prices, many utility customers are turning away from coal.

This has had a negative impact on many of America's coal companies, including Peabody Energy (BTU) and Alpha Natural Resources (ANR). They are seeing sales and profits decline substantially in this tough operating climate.

But it would be a mistake to write off all coal companies indiscriminately. In fact, there is one small cap which may prove to be a hidden gem. That would be coal Master Limited Partnership, Alliance Resource Partners LP (NASDAQ:ARLP).

The canary in the coal mine

Alliance Resource Partners is firing on all cylinders. Last quarter, it turned in record sales volumes, revenue, and net income. Revenue increased 8%, and diluted earnings per unit jumped 39%.

The company saw success in both of its key operating regions, the Illinois Basin and the Appalachian region. One of the biggest reasons for its strong performance is that its mines are strategically positioned close to its end-users, which are primarily utilities and industrial companies. This keeps a lid on costs.

Most other coal companies simply can't match Alliance Resource. For example, Peabody Energy posted 2% revenue growth last quarter, but still lost $68 million from its continuing operations before income tax effects. This actually represented an improvement from the $83 million loss reported in the year-ago period, but it's still not good performance by any means.

These struggles are expected to continue this quarter, which is why Peabody management expects the company to lose as much as $0.53 per share.

For its part, Alpha Natural reported earnings results on August 6, and investors were clearly happy with what they saw. Shares of Alpha Natural spiked 8% on the day, even though its results were ugly. Alpha Natural lost $512 million last quarter. To be fair, the company took a non-cash goodwill impairment charge that should probably be stripped away from its core operations. But even when you exclude this charge, the company still lost $123 million. This was worse than its performance in the same quarter last year.

Alliance Resource's compelling yield

Alliance Resource is classified as a Master Limited Partnership, meaning it's required to pass-through most of its cash flow to investors. Here's how its distribution stacks up against the dividends offered by its peers:

Current Yield

5-Year Dividend CAGR

2013 Payout Ratio

Alliance Resource Partners

5.2%

10%

31%

Peabody Energy

2.1%

7%

100%

Alpha Natural Resources

0%

N/A

N/A

Click to enlarge

The best of the bunch

As you can see, Alliance Resource Partners stands far above its competitors in the realm of investor rewards. Its 5.2% distribution yield is more than double Peabody Energy's dividend yield, while Alpha Natural doesn't even offer a dividend.

This is possible because of Alliance Resource's superior financial performance. Its diversified assets are performing extremely well. Its costs are under control, demonstrated by the fact that costs per ton fell to the lowest level ever for the Appalachian mines.

Alliance Resource Partners has increased its distribution for 25 quarters in a row. Management maintains an optimistic outlook for the rest of the year. This means that going forward, future distribution increases are likely.

Disclosure: The author is long ARLP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.