ARLP Stock Continues to Be a Compelling Energy Play
When investors think of a green economy, thermal coal probably doesn’t come to mind. It’s neither green nor pristine.
Thermal coal is dusty, dirty, and non-renewable, and it’s responsible for over a third of the world’s electricity generation.
Coal has other uses, too; it’s crucial for manufacturing steel, iron, and cement and for numerous industrial and residential applications. (Source: “Coal,” IEA, last accessed October 2, 2024.)
In fact, global coal demand has been at record levels for years. And it’s continuing to grow, with demand from China and India expected to increase significantly over the coming decades. Strong demand is also expected to come from electric vehicles (EVs), data centers, and the artificial intelligence (AI) revolution. (Source: “Investor Presentation, August 2024,” Alliance Resource Partners, L.P., last accessed October 2, 2024.)
Data center growth is forecasted to exceed $150.0 billion through 2028, fueled by AI, which is significantly more energy-intensive than traditional data center applications. EVs, meanwhile, could account for six to eight percent of total electricity demand by 2035, up from 0.5% today. Here in the U.S., electric light vehicle sales are estimated to reach approximately 55% in 2030 and 70% in 2035.
These tailwinds can’t help but be good for Alliance Resource Partners, L.P. (NASDAQ:ARLP) over the near and long terms.
Alliance Resource Partners is the largest coal producer in the eastern U.S., serving utility, industrial, and steelmaking customers both domestically and internationally.
In 2023, the company shipped 34.4 million tons of coal. Of that, approximately 80.9% was purchased by domestic electric utilities, 15.7% was sold into international markets, and 3.4% was sold to domestic industrial customers.
Alliance Resource is also a diversified natural resource company that owns a growing portfolio of mineral and royalty interests in strategic oil-and-gas-producing regions across the U.S.
It markets its oil and gas mineral interests for lease to major operators in those regions and generates royalty income from the leasing and development of those mineral interests. The partnership also generates coal royalty income from mineral reserves and resources it owns and leases to its coal mining operations.
Solid Q2 Results Hampered by Temporary Tailwinds
For the second quarter ended June 30, 2024, Alliance Resource Partners announced that revenue slipped 7.6% year over year to $593.3 million, missing Wall Street projections of $632.3 million. (Source: “Alliance Resource Partners, L.P. Reports Second Quarter Financial and Operating Results; Declares Quarterly Cash Distribution of $0.70 Per Unit and Updates 2024 Guidance,” Alliance Resource Partners, L.P., July 29, 2024.)
The revenue miss was a result of an 11.8% drop in coal sales volumes from transportation delays that were impacted by flooding on the Ohio River. Rail and port logistics meanwhile were disrupted by the Baltimore bridge incident, which affected shipments from its Appalachia rail operations.
On the plus side, coal sales prices grew 3.8% to $65.30 per ton sold. Oil and gas royalty volumes were up 6.8% at 817 million barrels of oil equivalent (MBOE).
Net income was $100.2 million, or $0.77 per basic and diluted limited partner unit, compared to $169.8 million, or $1.30 per basic and diluted limited partner unit, in the second quarter of 2023. Wall Street was looking for earnings of $0.95 per unit.
During the quarter, Alliance Resource enhanced its liquidity position to $666.0 million, which included $203.7 million in cash and $462.3 million of borrowings available under credit facilities.
Commenting on the results, Joseph W. Craft III, the company’s chairman, president, and chief executive officer, said, “Our well-contracted order book continued to provide stability for our business, delivering improvements in coal sales pricing per ton compared to both the 2023 Quarter and the Sequential Quarter.”
“Additionally, our Oil & Gas Royalties segment reported a 6.8% increase in BOE volumes year-over-year during the 2024 Quarter as our Permian-weighted minerals portfolio continues to realize production growth from recently drilled and completed wells.”
Business Outlook
According to Craft, since the start of the past summer, cooling demand was strong across many parts of the country. This is encouraging in light of the mild 2024 winter and persistently low natural gas prices. Demand for thermal coal production is expected to exceed supply by close to 20 million tons in the back half of 2024.
As for Alliance Resource’s Oil & Gas Royalties platform, its year-to-date performance and continued strong activity across its Permian Basin acreage have set the stage for another robust year. As a result, management increased volume guidance across all three commodity streams within its Oil & Gas Royalties segment.
Craft concluded, “The increase in coal-fired generation and inventory drawdown is constructive for the U.S. thermal coal market and for ARLP as we look forward to next year and beyond.”
“We remain confident in the core fundamentals expected to drive rapid growth in electricity demand for many years to come, including the increasing power requirements stemming from AI, data centers, and the onshoring of U.S. manufacturing.”
Alliance Resource Stock: Maintains Quarterly Distribution of $0.70/Unit
Thanks to the company’s conservative balance sheet, strong free cash flow, and equally strong distributable cash flow generation, investors in Alliance Resource stock have been on the receiving end of a reliable distribution.
Since its inception in 1999, the partnership has paid cumulative cash distributions of approximately $4.0 billion. In July, Alliance declared a quarterly cash distribution of $0.70 per unit, or $2.80 per share, for a current yield of 11.1%. (Source: “Alliance Resource Partners, L.P. Declares Quarterly Distribution of $0.70 Per Unit; Announces Robinson Retirement from Alliance Board, Vining Election to Alliance Board, and Watson promotion to Senior Vice President,” Alliance Resource Partners, L.P., July 26, 2024.)
That payout is safe, too; Alliance Resource stock’s payout ratio is just 69.3% with a distribution coverage of 1.43x. Over the long-run, management is targeting a distribution coverage ratio of 2.0x to 2.5x.
Alliance Resource Stock Hits New Record High
Since bottoming in October 2020 during the health crisis, ARLP stock has been on a tear, rising 1,180%. That’s adjusted for dividends. Had you decided not to reinvest those dividends, the return slides to 804%.
Most recently, on June 3, Alliance Resource stock hit a new record high of $25.53. The stock took a hit in July on missed second-quarter earnings and revenue, but it has since rebounded.
Trading hands at $25.21 per unit, Alliance Resource stock needs to climb just 1.2% to hit a fresh high. Wall Street thinks it will surpass that level with a 12-month share price target range of $27.00 per unit to $28.00 per unit. This points to upside potential of seven percent to 11%.
As of this writing (October 2, 2024), ARLP units are up:
- 30% over the last six months
- 28% year over year
Chart courtesy of StockCharts.com
The Lowdown on Alliance Resource Stock
Alliance Resource stock continues to be a great energy pick, with the company consistently delivering a strong operating and financial performance while maintaining a conservative balance sheet throughout the commodity cycle.
Its properties, which are strategically located in close proximity to domestic customers and developing countries in the Middle East, North Africa, and Asia, continue to build coal-fired power generation. This more than helps offset the shuttering of plants in Europe.
Domestically, significant growth in U.S. electricity demand from EVs, onshore manufacturing, and data centers (including AI) has delayed the retirement of coal-fired power plants.
All of this bodes well for Alliance Resource Partners. It already is showing the benefits. The company reported record 2022 and 2023 results with that bullish sentiment expected to continue in 2024 and 2025.
This should help Alliance Resource stock continue to provide shareholders with a reliable dividend. It should also help propel the stock to fresh highs too.