Alliance Resource Partners, Best House in Bad Neighborhood
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Alliance Resource Partners Looking Interesting, Down 12% on Obama
I wrote a piece on Friday about coal MLP Alliance Resource Partners (NASDAQ: ARLP). In this update for TMF, I will discuss the many attributes of Alliance on a standalone basis and relative to peer coal producers. This article will be substantially different from my other article, but the outcome is the same. I recommend investors buy Alliance Resource Partners on dips.
Why am I so bullish on Alliance when U.S. coal producers are in the dumps? Because Alliance's management team has positioned the company in an uncanny way to thrive, even in a terribly weak coal market. In previous articles for TMF I have provided various operating metrics supporting my favorable view on the company.
Move Over Peabody Energy, the New Best in Class is Alliance Resource Partners
Here is a different comparison of Alliance to peers. Everyone knows that coal production in the U.S. is under pressure, that almost every coal company is cutting back tonnage. Consider this: From 2009 to 2013 (estimated) production, Peabody Energy, Cloud Peak, and Consol Energy, have grown or shrunk at 4 year CAGRs of +0.4%, -0.5% and -0.9%, respectively. Over the same four year period, Alliance has grown by a remarkable 11% CAGR. Outperformance like this is a reason behind 15% distribution growth over the past nine years.
Importantly, I chose these companies because none of them made significant acquisitions like Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI) did. In 2011 Alpha acquired troubled Appalachian producer Massey Energy. Alpha has regretted it ever since. Due to this ill-timed but transformative acquisition, production comparisons between Alpha and Alliance are not relevant.
Arch acquired International Coal, gaining some prospective coking coal assets, most of which are not yet in production. Like Consol, Cloud Peak and Peabody, the company's production is down from 2009 to 2013, (estimated). Not until 2014, if at all, will other coal companies have a chance of catching up to Alliance's margins.
Sometimes Good Things Happen to Those Who Wait
It wasn't always this way. Two years ago Alliance didn't look so smart. Back then the popular diet was acquisitions, exports and coking coal. Walter Energy (NYSE: WLT), Alpha and Arch rue the day they succumbed to peer pressure, buying at the top of the market last year. All three are now struggling with heavy debt loads. All three have had to obtain costly amendments to bank facility covenants to make it through this cycle. Even so, It's not certain that all three will make it through this cycle.
Alliance has a debt leverage ratio that's the envy of the coal industry, and other industries as well for that matter. Net debt (gross debt - cash) of about $700 million compares to 2013 EBITDA of $550-$600 million. The ratio between those two numbers is about 1.2x, the lowest in the industry. By comparison, Arch might have debt leverage of 10x next year's EBITDA. A year ago, analyst estimates for Alpha's 2013 EBITDA were well over $2 billion a year. Today the consensus is closer to $500 million.
Things can and do change quickly in the coal stocks. The only thing changing quickly for Alliance is its distribution, which is quickly increasing. I sound like a broken record (younger readers might not get that expression) in recommending the units of Alliance Resource Partners, but I truly believe it offers a compelling risk-adjusted opportunity. With a 7.45% yield, investors can hardly do better.
MockingJay2011 owns shares of Alpha Natural Resources, Walter Industries, CONSOL Energy, and Alliance Resource Partners, L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.