Alliance Resource Partners Reports Strong Q4 Results
Alliance Resource Partners (NASDAQ:ARLP) recently reported its Q4 2015 and full-year 2015 financial results, and the coal producer impressed. Despite a decline in coal prices, Alliance was able to effectively manage its cash costs and produce a solid amount of cash flow.
In the quarter, revenue declined by 8.2% to $542.2 million compared to last year. Total coal tons sold also fell by .8% to 9.97 million tons. However, despite the decline in production and the decline in coal prices, it was a positive report in my view. The market seems to agree, as Alliance's stock is up over 5% since earnings.
Here are five things I think investors should take away from the quarterly earnings:
1. Cash Costs Fall
A reduction in production and a decline in coal prices was offset by a large decline in operating costs, as Alliance reported segment adjusted EBITDA expense per ton of $33.19, which compares favorably to the $35.69 per ton expense reported in the 2014 quarter.
For the full-year 2015, Alliance reported $34.20 adjusted EBITDA expense per ton, a 1.7% drop from 2014.
The reduction in cash costs was due mainly from a production scale back at various mines, reduced selling expenses due to lower coal prices, a more favorable sales mix, and lower labor expenses.
2. The Dividend is Safe
Alliance has decided to maintain its quarterly cash distribution of $.675 per unit, an annualized rate of $2.70 per unit, which represents a 3.8% increase over the cash distribution for the 2014 quarter.
This is pretty significant, because at the current share price of $13.48, it gives shares a 19.07% yield. In other words, a $5,000 investment in ARLP buys you 370.91 shares at the current stock price, which would provide $1,001.48 in income for 2016, assuming the company maintains this dividend in Q2 - Q4 2016.
Readers may be wondering if this dividend is safe for 2016, and in my opinion, the answer is yes due to the company's low-cost operations, reduction in capital expenditures, coal sales contract positions, and strong balance sheet. The company's distributable cash flow is expected to cover the distribution by 1.1 to 1.2 times, according to the company. Please read down further below for the 2016 EBITDA and net income estimates.
3. Committed Coal Contracts Equal 34.3 Million Tons for 2016
Alliance has secured price commitments for 34.3 million tons of coal production for 2016 (at prices higher than current coal spot prices) and has also secured price commitments for approximately 19.1 million tons in 2017, 14.5 million tons in 2018, and 7.1 million tons in 2019. ARLP anticipates its average coal sales price per ton will be approximately 3.5% to 6% lower in 2016 compared with 2015, but this still should lead to a real profitable year.
4. Strong Balance Sheet
Alliance exits 2015 with total liquidity of $42.5 million, plus a fairly conservative leverage ratio of 1.2 debt to EBITDA. According to financial statements, Alliance ended the year with $819.35 million in debt. This may sound like a lot of debt, but compared to peers Peabody Energy (NYSE:BTU), which ended last quarter with $6.28 billion in long-term debt, and the now bankrupt Arch Coal (NYSE:ACI), which had over $5 billion in debt, it's really not a large sum by any means (especially given Alliance's profitability).
The company expects its leverage ratio to increase by a small amount in 2016, but should go no higher than 1.6 times, which is one reason why the dividend should be safe in 2016. At 1.6 times debt to EBITDA, it would mean $511.8 million in 2016 EBITDA assuming the debt remains the same at $819.35 million.
5. Solid Estimates for 2016
Alliance gave its 2016 estimates in the news release. Average coal sales price per ton will be 3.5% to 6% lower than 2015. However, for 2016, the company expects 33.7 to 35.7 million tons of coal production, $1.82 - $1.95 billion in revenue and $545 - $615 million in EBITDA, and $230 - $300 million in net income.
Now, with 74.9 million units outstanding, Alliance would earn $3.07 per unit with $230 million in net income, up to $4.0 per unit with $300 million in net income. That gives the stock a forward P/E between 3.37 - 4.39, which is obviously quite low.
ARLP is also reducing capital expenditures significantly in 2016 to an estimated range of $134 million to $142 million, including maintenance capital expenditures, compared to $287.8 million in 2015.
The Bottom Line
Alliance has remained profitable and continues to pay a big dividend to unitholders, despite the turmoil in coal and commodity markets. With its conservative, unleveraged balance sheet, secured coal price commitments for 2016, lower operating costs and capital expenditures, the company is in good shape, so I think shares will rebound sharply this year. In the meantime, investors can continue to collect the dividend and wait for a rebound.
Disclosure: I am/we are long ARLP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.