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Alliance betting on more growth in coal while widening exposure to oil, gas

Alliance Resource Partners LP is among the few companies investing much capital into new and expanding coal operations, but it is looking for ways to expand its footprint in the oil and gas sectors.

The company recently reported year-over-year increases in coal production, revenues, net income and EBITDA while launching a team dedicated to expanding Alliance's presence in oil and gas in 2019, Alliance President and CEO Joseph Craft said on a Jan. 28 call.

Alliance is planning to deploy between $360.0 million and $400.0 million in capital expenditures in 2019 as it eyes growth in both its coal and oil and gas segments.

Passive investments in oil and gas generated about $52.4 million in cash flow in 2018, Craft said. Late in 2018, Alliance decided to expand participation in the oil and gas sector. The company is estimating that oil and gas royalties will contribute about $37 million to $47 million to its EBITDA in 2019, about 5% to 6% of the company's estimated total. Starting in the first quarter of 2019, the company will report a new royalty segment in its securities filings with hopes of putting a spotlight on those gas and oil investments.

"We plan to assemble our own team to grow this part of our business. Going forward, this dedicated team will focus on increasing the percentage contribution from oil and gas royalties to ARLP's total EBITDA," Craft said. "Looking ahead, we expect record performance from our coal operations and increasing contributions from oil and gas royalties will support our goal of increasing cash returns in delivering long-term value for our unit holders."

Alliance Senior Vice President CFO Brian Cantrell added that while the company is looking to expand into oil and gas, it also plans to maintain the company's history of keeping a very conservative balance sheet and not "levering up to go pursue oil and gas opportunities."

The partnership is one of the few large, public U.S. coal producers to avoid a wave of bankruptcies in 2015 and 2016 that was largely the result of a debt-fueled pursuit of metallurgical coal assets that occurred just before global prices for the commodity rapidly declined.

Craft said Alliance increased year-over-year coal production by more than 7% in 2018 by reopening its Gibson North mine and adding a new production unit at its River View mine. Alliance has reported some success tapping into international thermal and metallurgical coal markets, increasing shipments to those markets to 11.2 million tons to make up about 27.8% of Alliance's 2018 coal sales volumes, Craft added. The company is planning for export volumes to rise another 10% in 2019.

In its earnings report, Alliance reported that record coal sales and higher coal prices drove revenues to $2.0 billion in 2018, up 11.5% compared to 2017.

The partnership also reported plans to invest approximately $40.0 million to $45.0 million of capital to increase production at the River View and Gibson mines. It expects to dedicate another $40.0 million to $45.0 million to growth capital for the development of Excel Mine No. 5, which Alliance recently began developing as an extension to its MC Mining operation in Pike County, Ky.

Alliance recorded $40.5 million of noncash asset impairment charges negatively impacting earnings in the fourth quarter of 2018. That includes a $34.3 million impairment related to an uncertain mine life at the company's Dotiki operation and a $6.2 million impairment of some of the company's coal reserves in Illinois. The asset impairment charges contributed to a 31.6% decrease in net income attributable to Alliance in the fourth quarter of 2018 compared to the year-ago quarter, falling to $50.8 million from $74.2 million.

Craft said he expects coal production and demand to be relatively flat in the domestic markets Alliance serves.

"We will probably lose some demand over the next two years in the 10 million-ton range, so there will be some shortfall there," Craft said. "But for the plants that we have targeted, we see a very stable market opportunity for us."