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Alliance Resource Partners, L.P. (ARLP): A Diversified Energy Leader Poised for Growth
Published on September 24, 2024 | Ticker: ARLP

Alliance Resource Partners, L.P. (NASDAQ:ARLP) is a diversified natural resource company that generates operating and royalty income from the production and marketing of coal to major domestic utilities, industrial users, and international customers, as well as royalty income from oil & gas mineral interests. With a strong track record spanning over 25 years, ARLP has established itself as a reliable, low-cost coal producer with access to both domestic and export markets, making it a consistent cash flow generator.

Financials

In 2023, ARLP reported annual net income of $630,118,000, annual revenue of $2,566,701,000, annual operating cash flow of $830,642,000, and annual free cash flow of $451,304,000. The company's diversified business model, which includes coal operations and oil & gas royalties, has enabled it to navigate market challenges and deliver solid financial performance.

During the second quarter of 2024, ARLP reported net income attributable to ARLP of $100.2 million, or $0.77 per unit, compared to $169.8 million, or $1.30 per unit, in the year-ago period. Adjusted EBITDA in the second quarter of 2024 was $181.4 million, compared to $249.2 million in the prior year period. The decreases in net income and adjusted EBITDA were primarily due to lower revenues and higher total operating expenses.

Business Overview

Coal Operations Segment

ARLP's coal operations are divided into two reportable segments: Illinois Basin Coal Operations and Appalachia Coal Operations. These segments correspond to major coal-producing regions in the eastern United States with similar economic characteristics, including coal quality, geology, coal marketing opportunities, mining and transportation methods, and regulatory issues.

In the Illinois Basin Coal Operations segment, sales volumes decreased 4.6% in the second quarter of 2024 compared to the prior year period, primarily due to lower sales at the Hamilton mine. Coal sales prices in the Illinois Basin increased 4.9% year-over-year, driven by improved domestic price realizations.

The Appalachia Coal Operations segment experienced a 27.3% decline in sales volumes in the second quarter of 2024 compared to the prior year period, primarily due to lower shipments from the MC Mining and Tunnel Ridge mines. However, coal sales prices in Appalachia increased 8.7% year-over-year, reflecting higher realized pricing at the Tunnel Ridge operation.

The company's coal royalties segment, which includes coal mineral reserves and resources owned or leased by Alliance Resource Properties, saw a 2.8% decrease in coal royalty tons sold and a 2.8% increase in coal royalty revenue per ton during the second quarter of 2024 compared to the prior year period.

Oil & Gas Royalties Segment

ARLP's Oil & Gas Royalties segment includes the company's oil & gas mineral interests, which are primarily located in the Permian (Delaware and Midland), Anadarko (SCOOP/STACK), and Williston (Bakken) basins. This segment continued to deliver strong results, with volumes reaching 817,000 barrels of oil equivalent (BOE) in the second quarter of 2024, a 6.8% increase year-over-year. Average realized sales prices per BOE were up 3.1% versus the prior year period and 8.2% sequentially.

Outlook

For the full year 2024, ARLP has adjusted its guidance to reflect lower coal sales volumes, primarily due to a reduction in export market sales. The company now expects total coal sales volumes to be in the range of 33.5 million to 34.5 million tons, with a midpoint of 34 million tons, which is 2.6% below the original guidance midpoint.

In the Illinois Basin, ARLP expects sales volumes to be in the range of 24.25 million to 25 million tons, while Appalachia sales volumes are expected to be between 9.25 million and 9.5 million tons. The company has also increased its expected sales price per ton sold to a range of $63.75 to $64.50, up from the previous range of $61.75 to $63.75.

For the Oil & Gas Royalties segment, ARLP has raised its guidance for oil production to 1.5 million to 1.6 million barrels, natural gas production to 5.8 million to 6.2 million Mcf, and liquids production to 750,000 to 800,000 barrels, reflecting the continued strong performance of the company's mineral interests.

Liquidity

ARLP's balance sheet and liquidity position have been further strengthened by the successful issuance of $400 million of 8.625% senior unsecured notes due in 2029, which were used to redeem the outstanding $284.6 million of senior notes due in 2025. At the end of the second quarter of 2024, the company's total and net leverage ratios were 0.61 times and 0.36 times total debt trailing 12 months adjusted EBITDA, respectively, and its liquidity increased to $666 million, including $203.7 million in cash and cash equivalents.

The company's strong financial position and liquidity provide it with the flexibility to pursue growth opportunities in its core coal and oil & gas royalties businesses, as well as explore new ventures that leverage its expertise and relationships. ARLP is actively evaluating potential investments in the energy and infrastructure transition space, including opportunities related to data centers, electric vehicle charging, and renewable energy.

Risks and Challenges

While ARLP has demonstrated its ability to navigate market challenges, the company faces several risks and uncertainties, including:

1. Decline in the coal industry's share of electricity generation due to environmental concerns and the cost and perceived benefits of alternative energy sources. 2. Volatility in commodity prices, particularly coal and oil & gas, which can impact the company's revenues and profitability. 3. Increased competition in both domestic and international coal markets. 4. Regulatory changes and environmental regulations that could impact the company's operations and costs. 5. Potential disruptions to its supply chain and transportation logistics. 6. Successful execution of its growth initiatives and integration of any future acquisitions.

Conclusion

ARLP's diversified business model, strong financial position, and strategic investments position the company for continued success. The company's focus on operational excellence, cost control, and prudent capital allocation has enabled it to generate consistent cash flows and deliver value to its unitholders. With a robust pipeline of growth opportunities in both its core coal and oil & gas royalties segments, as well as emerging energy and infrastructure transition ventures, ARLP is well-positioned to capitalize on the expected increase in electricity demand and the ongoing energy transition.

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