Alliance Resource: Coal-Fired Gains

05/13/2015 8:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Unlike most of the coal business, this featured recommendation in the sector reported a solid quarter, observes Jack Adamo, editor of Insiders Plus.

Alliance Resource Partners, L.P. (ARLP) saw total revenues climbed to $560.4 million, an increase of 3.4% compared to the quarter ended March 31, 2014.

Coal sales were actually down 1.5%, but that was more than offset by a 19% increase in transportation fees.

Net income decreased 8.1% to $106.5 million or $0.92 per basic and diluted share, primarily due to increased depreciation, depletion, and amortization expense. By comparison, most coal companies continue to lose money.

Alliance increased the cash distribution to unitholders for the 2015 quarter to $0.6625 per unit (an annualized rate of $2.65 per unit), payable on May 15.

The announced distribution represents an 8.4% increase over the $0.61125 per unit for the comparable 2014 quarter and a 1.9% increase over the distribution of $0.65 for the quarter ended December 31.

Management said that demand for US thermal coal dropped further than expected this year and industry supply cutbacks have been slow to respond.

The company has decided to reduce production further in 2015 to reduce expenditures until industry and supply come back into better alignment. It expects its reduced production to have minimal impact on cost per ton sold.

This isn't bravado. ARLP has committed and priced 96% of its anticipated coal sales in 2015 and has secured coal sales and price commitments for approximately 28.9 million tons in 2016, which is more than two-thirds its anticipated sales.

Even after the recent 30% pullback, the shares are up 18-fold in the 15 years the company has been public. Nonetheless, I want to know how the oddity of earnings works.

At their current price, Alliance shares yield 7.7%. While I think there's still short-term downside risk, I'm removing the hold from the stock. Alliance Resource Partners, L.P. is a buy up to $36. Take a 2% position in the High Income Portfolio.

Remember that limited partner units are best used in non-tax-deferred accounts. In tax deferred accounts, there are tax issues that damp some of the benefits.

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