Alliance Resource Partners, L.P. (ARLP), Linn Energy LLC (LINE): The Contrarian Coal Stock Killing the Competition

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In some ways, Alliance Resource Partners, L.P. (NASDAQ:ARLP) defies all logic of what is happening in the coal space today. The company doesn’t do a significant amount of exporting and it has shut in its metallurgical coal. Despite all of these “disadvantages”, the company is on track to post its 13th consecutive record year and is running circles around its competitors. How is this possible? Let’s take a look at what Alliance does right and what other coal stocks can learn from it.

Taking control of costs

Alliance Resource Partners, L.P.The coal industry in the U.S. is unique compared to other resources because different coal basins in the U.S. run on wildly different economics. While it would be almost impossible for a coal company to survive in the Appalachian region if prices were in the $40 range, that same price would double what coal companies in the Powder River Basin sell for. This makes it rather difficult to give a pure apples-to-apples comparison for many coal companies in the U.S. So instead of looking at pure costs, let’s look at gross margins.

Company Coal Production*
Revenue per Ton Sold** Cost of Goods Sold**
Gross Margin
Alliance Resource Partners, L.P. (NASDAQ:ARLP) 9.8 million tons $56 $35.50 36.6%
Peabody Energy Corporation (NYSE:BTU) 61 million tons $28 $23 17.8%
Arch Coal Inc (NYSE:ACI) 35 million tons $21 $18 14.3%
Alpha Natural Resources, Inc. (NYSE:ANR) 22.9 million tons $56 $51 8.9%

Source: S&P Capital IQ, author’s calculations. * Most recent quarter. ** Average of most recent quarter.

Alliance Resource Partners, L.P. (NASDAQ:ARLP) has a strong presence in the emerging coal regions in northern Appalachia and the Illinois Basin, which means that the company can command a much higher price for its coal than Powder River Basin producers because shipping costs and quality work in favor of coals from these areas. This makes its product more attractive to coal-powered facilities in the eastern U.S. despite the fact that these coals have a generally higher sulfur content than Powder River Basin coal and are in much more direct competition with natural gas for utility business than in other parts of the country.

Up until recently, the fact that Illinois Basin and Appalachian coal had a higher sulfur content meant that it couldn’t really compete with Powder River Basin Coal due to EPA restrictions on sulfur emissions. So much of the production from these places was deemed unsuitable to consume. Today, though, utility companies are equipping themselves to remove sulfur from emissions, so a higher sulfur coal can be consumed without the implications of higher emissions. In turn, coal companies with a strong position in these regions are getting the benefit of mining more abundant coal seams with a more competitive location.

What also has set this coal stock apart from its peers is its propensity to focus on organic growth and make smaller acquisitions. Back in 2011, Peabody, Arch, and Alpha all made major acquisitions that eventually led to high debt levels. Debt has drastically affected these companies’ bottom lines as coal prices have steadily declined since then. Rather than jumping on the buyout wagon, Alliance Resource Partners, L.P. (NASDAQ:ARLP) has focused on keeping the balance sheet clean and bringing its own new mines on line, delivering rather extraordinary results thus far.

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