Alliance Resource Partners: Buried by Profits

Reading the newspaper and reading the “green” headlines, you would almost believe that we’d be fossil free within years. The reality of the world’s energy situation is that we are barely keeping up with demand as it is. And demand is growing by the year.

It’s not just the in the United States. Last year American producers exported 59 million tons of coal. Coal exports should increase to almost 80 million tons by the end of this year, and expectations are it will rise to 120 million tons within the next few years.

Currently, more that 48% of the electricity we use is generated from coal. And in the United States alone there are almost 26 coal power plants under construction, with another 39 in various stages of planning.

Coal has been used for more than 10,000 years as a fuel source, and it’s going to be around for quite a bit longer. These “green” breakthroughs are going to take some time to figure out. And until that time, coal is going to be in demand to supply the energy demands of a power hungry world.

We’ve seen coal prices double in the last year from $55 to $100 a ton, and its not hard to imagine them doubling again before the middle of next year.

It’s true that the coal industry is a major polluter, but that’s starting to change. Coal companies are working with carbon sequestration and other ‘zero’ emissions programs to clean up their act. But that too, will take time to change. I’m not weighing in on the moral aspect of an industry that 8 billion tons of pollutants to our atmosphere every year…

And neither should you, because we’re here to make money. Make your money first, and then you can go save the world. So lets get to work.

My latest pick is Alliance Resource Partners (NASDAQ: ARLP). Alliance produces coal used for steam electrical generation. They are the fourth largest coal producer in the United States.

Alliance kicks out a healthy dividend – currently at 4.2% – and more importantly, a sustainable dividend. They’ve consistently raised it by 120% over the last five years.

With a comfortable P/E ratio of 15.11, they’ve also increased their coal production by 816, 000 tons in the first quarter of the year alone.

Arguably this company has had a significant rise in price over the last four months. It’s up over 55% since March. But there’s still a considerable amount of room left for this company to run.

Coal producers reported last month that they expect the coal shortfall of coal to run 25 to 35 million tons for 2008, and even greater shortfalls into 2010. That spells increasing profits for coal in the long-term.

With the market heading south, and our averages tipping over the bear market indicators, stock investments should be based with winners until the markets show a clear bottom. Until then, stick with the winners, and stick with Alliance

Disclosure: Author holds a long position in ARLP

Comments

[mlp investor:]

Or you can own the GP of the company, AHGP. AHGP owns a large chunk of the LP and is entitled to 50% of every incremental dollar earned at ARLP. Next quarter ARLP will give 4%-6% increase in the distribution and AHGP will increase the distribution 8%-10%.

2008 Jul 01 09:22 AM

[SteveSz:]

Please do not call carbon dioxide a pollutant. CO2 is the essential plant nutrient that enables life as we know it to exist on earth. The hoax of man-made global warming is the most science-free pile of manure ever created. Historians will ponder how anybody fell for such non-sense. Did you ever wonder why the CO2 moonbats have replaced "Carbon Dioxide" with "Carbon"? Both are important terms and both are essential to the discussion... but combining them into one ambiguous "Carbon" pollutes the language and prevents any intelligent discussion from taking place. I'm long 100,000,000+ pounds of coal via ARLP.

2008 Jul 01 10:23 AM

[Diet_Coke1x:]

If you like ARLP, take a look at AHGP. It is the general partner of ARLP and grows its distribution at twice the rate of ARLP. Since they are now trading at almost identical yields, it is a VERY compelling opportunity especially if you are bullish on coal.

2008 Jul 01 11:17 AM

[SteveTheHawk:]

I'm not sure what to make of ARLP in regards to future potential. I've held it for some time with my yield at cost being about 6.7%. The current yield is about 1% lower than the 5 year average. This, I believe, makes the yield slightly less appealing for potential buyers. I can't buy any more in that it now represents about 10% of my portfolio. That allocation thing is getting in my way.

So, my question is whether to hold and hope for price appreciation, or sell and take my profits. I'm concerned about an energy bubble. I think the long range direction for energy stocks is up. What I'm concerned about is keeping my profits intact. Any thoughts?

2008 Jul 01 09:28 PM

[cynic69:]

Dear SteveSz
I live in Newport Beach Ca. Our city spends millions every year trying to keep the rising ocean from spilling into the living rooms of our bay front homes. Hummm I wonder why.

2008 Jul 01 11:22 PM

[pachanguero:]

Global warming is a scam. Oh and Gale.....did you go to public school and then get your GED?

Maybe you should try reading a book instead of getting your news from the TV.


Buy ANR

2008 Jul 02 08:09 AM

[blink0404:]

as the market continues to go down, coal, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...

2008 Jul 03 12:22 PM

[jjason:]

Does anyone ever take a look at the Price to Book and Price to Tangible Book values of coal companies?

Most of these companies are overvalued and if Congress gets to fixing the problems on the commodity exchanges then oil prices will come down and so will coal prices.

2008 Jul 04 07:29 AM