Alliance Resource Partners (NASDAQ: ARLP) has gained more than 220% over the past year, with the broader energy sector seeing phenomenal growth as inflation rises.
Arch Resources, Inc. (ARCH) has gained 270.93% since 2021, Peabody Energy (BTUs) increased by 478% while energy fuels (UUUU) is up 33.58% over the same period. This growth has outpaced experts’ concerns that the coal market faces a bleak future. The push to regulate greenhouse gas emissions by environmental activists, regulators and global governments cannot be ignored. Yet the resilience of this industry shows that investors are pumping money into coal stocks as a robust economic recovery is expected.
Alliance Resource Partners expects domestic coal export prices to rise in 2023. This expectation will likely see the company increase export volumes next year with strong guidance for full year 2022 Investors should also expect higher average commodity prices as the company is on a mission to reinvest its free cash flow into other oil and gas minerals. Underinvestment in fossil fuel production since 2019, caused by the Covid19 pandemic and increased government decisions on climate policy, has caused a global shortage of coal, oil and natural gas. In my opinion, ARLP’s focus on the international market, including broader investment in electric vehicle charging, smart meters and demand side management, makes this stock a buy.
Q1 2022 balance sheet
In its Q1 2022 earnings release, ARLP’s quarterly cash level rose the highest to $122.4 million. It gained 17% (TQ) despite standing at a meager $37.7 million in June 2021. Since Q2 2021, the company has grown its cash position by over 224%.
The selling price of a tonne of coal jumped 13% in the quarter, with oil and gas prices gaining 74.9% per BoE. Coal royalties also increased by 9.2% per tonne. All of this boosted ARLP’s total revenue by 44.6% to $1.712 billion, while pre-tax income increased by 221%. EBITDA increased by 61.5%. The main challenge (from a financial perspective) that curtailed these improvements was a delay in coal shipments of 1.1 million tonnes. It cut coal revenue in the quarter by $72 million, EBITDA missed target by $31 million while net profit fell $27 million.
Still, the company has recorded impressive numbers. In the year ending December 2020, ARLP’s net loss was $129.2 million. In the first quarter of 2022, the company’s net profit had increased to $185.3 million (more than 240% increase in net profit in just 2 years).
It should be noted that net income was also reduced by $42.1 million (after a one-time non-cash deferred tax charge of $37.3 million and a current tax charge of $4.8 million). dollars). The tax charges resulted from ARLP’s conversion of Alliance Minerals into a taxable corporation for federal and state income tax purposes. The revelation here is that net income would have crossed the $230 million mark in the first quarter of 2022 alone.
ARLP’s election to convert Alliance Minerals to a taxable corporation will help reduce the company’s tax burden on its oil and gas royalty income. Rather than paying entity-level taxes at higher individual tax rates, the ARLP will pay lower corporate tax rates. Income tax expense as of December 2021 was $0.4 million and has increased to negligible levels since the company’s inception. But with the renewed call to reduce greenhouse gas emissions, the ARLP had no choice but to include this upgrade. In addition, the company intends to reinvest its free cash flow from Alliance Minerals in other oil and gas developments. This upgrade will prevent the company from being double taxed in the future.
There was a significant improvement in oil and natural gas prices during the quarter, which led to an increase in revenues. Oil surged above $100 a barrel while natural gas crossed the 7 MMBtu mark for the first time in a decade.
High production in times of inflation
Production on the ARLP acreage has increased significantly, leading to increased drilling and completions activity. In fact, production for the quarter increased by 14.7% (YoY) and +5% (QoQ).
An increase in production shows that Alliance Resource has been able to overcome rising inflation, which is up 8.5% (as of April 2022), supply chain bottlenecks, long movements -free couriers and personnel issues. In all honesty, only the occurrence of a global recession such as the one caused by the Covid-19 pandemic is able to limit the demand for fossil fuels. Clearly, commodity prices will remain high for years. The ARLP also pinned its hopes on the US commitment to increase LNG exports over the next decade.
According to the EIA, the United States began exporting more natural gas than it imported in 2017 on an annual basis. It has led to a steady increase in exports gas pipeline and liquefied natural gas (LNG). Forecasts show that LNG exports will average 12.2 billion cubic feet per day (Bcf/d) in 2022. By then, they will overtake Australia and Qatar and lead the global industry LNG export. Additionally, LNG exports are expected to grow by 2.4 Bcf/d in 2022 and 0.5 Bcf/d in 2023. These numbers confirm ARLP’s likely dominance in the LNG space.
As we can deduce, gas demand in Europe is obviously high as the continent tries to reduce its imports from Russia following the latter’s invasion of Ukraine. In the first four months of 2022, Europe was the first importer US LNG representing 65% of US exports. Additionally, the Biden administration has reached an agreement to increase its LNG supply in Europe. In the agreement, the United States committed to supply 15 billion additional cubic meters of LNG in 2022.
Europe would be expenses more than a billion dollars a day in coal, gas and oil imported from Russia. The belief that such spending is indirectly funding the war in Ukraine is pushing many EU countries not only to increase investment in renewable energy, but also to move away from Russia. The United States and Australia would have the capacity to replace 70% of Russian coal imported into the EU, even if prices exceed $400 a ton.
To achieve its production growth matrix of more than 5 times and increase shareholder value, ARLP has targeted various areas of potential investment. In its first quarter 2022 results, company CEO Joe Craft said
We seek to allocate capital expenditures to high return projects to maintain our competitive edge at low cost. Additionally, we will examine opportunities in mining beyond thermal coal to include metallurgical coal and other industrial minerals to capitalize on one of our core competencies, our mining expertise. These investments include: smart cameras, energy storage, energy efficiency, renewable energy generation, electric vehicle charging, smart meters and energy demand management. »
The company is focused on returning cash to its unitholders with its dividend yield (TTM) of 3.67% with a forward yield of 7.90%. Despite a 17% loss in its five-year dividend growth rate, ARLP aims to match its allocations for distributions to 30% of its estimated annual free cash flow. It has maintained a 4-year average dividend yield of 14.54% since 2016.
ARLP’s year-end yield in dividend growth fell from 22.09% in 2019 to 9.54% in 2020. At the time, the annual payout growth rate was also down 81%. .35%.
ARLP’s total liabilities since December 2021 have increased from $933.3 million to $992.2 million (an increase of more than 6% in just one quarter). However, the company was able to reduce its debt by $3 million and increase its book value per share by 0.6%.
The company is reeling from an increase in the segment’s adjusted EBITDA expenses per tonne of coal. It increased by 10.7% in the first quarter of 2022 to reach $32.90/ton from $29.72 in the first quarter of 2021. To curb inflationary pressure, including supply and maintenance costs, the company maintained its reduced labor supply at 895 employees from a high of 3,602 in 2019. However, net profit fell 52.4% since 2019, from $399.4 million to $190.2 millions of dollars.
At the end of the line
Despite a decline in its dividend growth history, ARLP has maintained a 4-year average dividend yield of 14.54% in an effort to return cash to its unitholders. Investors have also gained +200% over the past year, demonstrating the stock’s resilience in a highly inflationary environment. The company also intends to invest in high-yield efficiency projects and royalties to maintain its low-cost competitive advantage. Yet coal remains an attractive business for the company with customers such as Europe moving away from Russian coal. Additionally, the ARLP is confident of rising commodity prices due to increased US LNG exports over the next decade. For these reasons, we are offering a buy rating for the stock.