Alliance Resource Partners LP

Here’s another stock from the declining coal industry. The share of coal in US electricity production has fallen from 53% in 2000 to 24% today. Natural gas poses the greatest cost-effective threat to coal, without counting the threat from government mandates for using renewable sources.

Alliance Resource Partners LP (ARP) is a limited partnership listed on the NASDAQ that mines coal from the Illinois basin and Appalachia totaling seven coal mining complexes in the eastern United States. It is the second largest coal miner in the Eastern US. It supplies 79% of its output to domestic US electric utilities, 18% outside the US, and the balance to brokers and industrial companies.

ARP also earns royalties by leasing oil acreage it owns. In 2019, this amounted to only $52m.

ARP generated $1.96 billion in sales in 2019 and ‘adjusted’ ebitda of $600m that excludes several one-off items. Operating cash flows amounted to $517m and management indicate maintenance capex of $260m leaving behind net cash flows of $257m. Net income per unit has averaged $2.56 per unit and the most recent quarterly distribution was $0.40 per unit.

Net debt amounted to $774m or 1.3x ebitda, which is conservative. The debt involves fixed rate debt of $408m bearing 7.5% interest and $255m variable rate debt (revolving credit facility) at around 4.4%. The fixed rate debt is due in May 2025 and management extended termination of the revolving credit facility to March 2024 (and could draw on an additional $280m). Other debt maturities appear manageable.

Considering these facts, it’s extraordinary that the equity sells for just $461m or an enterprise value of just 2x 2019 ebitda. The current unit price of $3.50 is less than 2x earnings.

Covid-19 has led management to halt operations in the Illinois basin comprising 60% of 2019 revenues. It plans to resume based on utility demand, which has taken a hit with the decline in economic activity.

Management have also halted distributions or the March quarter and will review in the second quarter.

It’s worth noting that ARP’s most recent repurchase of stock in November 2019 for 1.475m units was at a price of $11.96/unit.

If ARP can survive this period without defaulting, and the debt maturities and undrawn facilities appear to indicate it can, patient investors have a substantial margin of safety at the current price of $3.50/unit to tide them through this uncertain period.