Alliance Resource Partners

Alliance Resource Partners LP (ARLP) is an Illinois Basin (ILB) and Appalachian (APP) thermal coal producer with a long, successful track record and is run by founder Joe Craft, whose family owns ~29% of outstanding shares (including his ex-wife’s shares). The company in its current form was born in 1999 when it IPO’ed as a Master Limited Partnership (MLP), and it has had a history of consistent, substantial distributions to unit holders.

Since its IPO in 1999, ARLP has generated an annualized total return of >15% compared to the S&P 500’s total return of 8%. Many a hedge fund manager would be happy with that performance, and it’s even more impressive that Craft pulled it off while virtually every other coal mining competitor went bankrupt over the last decade or so.

Source: YCharts.

Cumulative cash distributions since IPO are shown in the chart below. Solid distributions have been paid every year, with very few lean years.

Source: ARLP Investor Presentation, December 2024.

Quick note on the company structure. MLP’s generally produce steady income and unitholders receive the bulk of that income through cash distributions rather than dividends. There aren’t a lot of MLP’s operating in the coal space. The largest out there is NRP, which operates a similar business model, but with a focus on met instead of thermal coal. There was also Penn Virginia Resource Partners LP, but that went through a series of acquisitions and is now part of Energy Transfer Partners (ET).

The MLP structure means that holders of ARLP must file the somewhat-complicated form K-1 on their individual income tax returns, but there are benefits. Cash distributions are treated as a non-taxable return of capital as long as the unitholder’s tax basis remains above zero. That’s pretty helpful and especially so if you live in a high-tax district.

ARLP’s distribution yield often runs at levels north of 10%, which is much higher than the dividend yield of MLP’s in the pipeline space like Enterprise Products Partners (EPD), Energy Transfer (ET) and MPLX (MPLX), which typically yield in the 6-7% range.

Buybacks aren’t as much of a factor for ARLP as the company already distributes most of its cash to unit holders by design. However, there is a modest buyback program in place that has been utilized when the unit price’s decline warranted it. For example, it was used in 2018 and 2019 when unit prices dropped – at that time the Craft family also bought additional shares.

ARLP is, first and foremost, an income investment. When you buy ARLP shares, you can be sure that the company’s not going to surprise with a sizeable investment into the met coal sector to grow margins. That’s actually not a knock on BTU – it’s just the reality that many US coal companies have made those kind of acquisitions over the years.

ARLP management signs multi-year sales agreements, has good relationships with customers and slowly but steadily delivers on promises. By the 3rd quarter of the year, ARLP will typically have almost all of the next year’s sale tonnage booked and priced, with 2/3 of sales tonnage contracted and partially priced for a year ahead of that. In essence, ARLP is boring. The company plays it pretty safe and doesn’t like to take operational or sales risk and doesn’t chase maximum exports. All of that can limit earnings upside when coal prices take off, but, most of the time, boring is what you want from your coal company.

Segments

As shown in the chart below from late 2024, the bulk of ARLP’s adjusted EBITDA (~80%) is from coal production (with ILB production currently accounting for ~75% of that and APP the rest). The remaining ~21% of adjusted EBITDA over the last twelve months comes from the company’s royalty business, which is comprised of oil & gas royalty acreage and coal royalties. The O&G royalties are focused on the Permian, with additional acreage in the Delaware and Anadarko basins. The coal royalties are basically an extension of ARLP’s mining business because the majority of the reserves and resources are leased to Alliance mining complexes (i.e., it’s ARLP collecting royalties from its mining subsidiaries). Those royalties are predominately from ILB mining.

Source: ARLP Investor Presentation, December 2024.

With most EBITDA generated from the ILB, through production and production royalties, I’d want to know that the company has high-quality assets that will throw off cash in all industry conditions, that the company is going to be conservatively run and will follow the MLP game plan by not getting too creative. Check, check and check.

Free cash flow has been incredibly resilient over the last 14 years, with significant cash flows even during some bleak US coal market conditions (see 2012 and 2019).

Source: ARLP Investor Presentation, December 2024.

Tier 1 Assets

Cash flows are consistent even during market troughs as ARLP operates some of the best and lowest cost mines in the ILB. The River View and Gibson South mines are standouts as they’re high-productivity, low cost and have logistics options including rail and barge and can be exported. River View was brought online in 2009 and Gibson South was brought online in 2014. These are newly capitalized, well-run mines.

In APP, ARLP operates the large, high-productivity Tunnel Ridge longwall mine, complemented by the smaller MC Mining and Metiki operations. Like the ILB operations, Tunnel Ridge has access to the Ohio River, so it has great transportation options.

To sum up ARLP’s mining operations, TCT founder and coal analyst extraordinaire, David Dyer, said: “in a worst-case US thermal scenario, the only mines remaining in 10 years will be large volume surface operations and large volume longwall operations.” This describes ARLP’s key mines well – they are high-quality assets that will be some of the last mines standing in the US coal mining sector.

Royalties

As mentioned above, the coal royalties are just an extension of the mining business, which should be successful as more coal plants stay on longer in power markets that are starved of necessary baseload power generation. So let’s focus on the O&G royalties for a moment.

ARLP messages that its O&G royalties provide “hedge-free exposure to commodity price and cost-free organic growth potential.” That’s a good way to think about them. 81% of these royalties are linked to oil production and prices. Consistent with the rest of the company’s operations, they focus on top-tier operators in the Permian core, with additional exposure to Anadarko, Williston and Appalachia Basins. Essentially, they’ve acquired mostly top-quality assets that cash flow through all cycles.

ARLP has managed to grow O&G royalties in 2024 at a double digit rate (y/y) even with flat to declining oil prices. I’m expecting that low double digit growth in O&G royalties (~10-12%) should continue for several years. And the largest royalty payer is, as you might expect from ARLP, investment-grade oil major ExxonMobil.

Quibbles

If I have any knocks on the company, it’s that I don’t love the recent growth investments into motors and battery recycling (Infinitum and Ascend Elements, respectively) as I think those are too far from the company’s core mining and royalty businesses.

These represent equity investments in high growth businesses, so I get what ARLP is trying to do as they balance an eventual shrinking of the US coal market (but not this decade!). And these investments are relatively small. Total investment in Infinitum and Ascend is around $90M or a little over 10% of TTM EBITDA. So these are far from dealbreakers for me, I’d just prefer a return of that cash to shareholders or more royalty investing.

Investment Thesis

ARLP shares are a good way to play the data center/AI energy boom in the US, which is likely to support US coal demand. I wrote about the trend of coal plants staying online longer than expected in my recent TCT piece: Can I get an Encore?. ARLP is a much more cheaply-valued stock to play this them as compared to the merchant generating companies (Vistra-VST, Talen-TLN, Constellation-CEG), whose share prices have jumped sharply in 2024. 

MLP’s are generally sensitive to interest rates too, which I flag as a minor risk to share prices. I tend to think that inflation will be sticky at current levels as it seems to be stalling here, and I think that will tie the Fed’s hands. But that doesn’t seem to be driving ARLP unit prices. Looking at the last 5 years, ARLP unit prices have been pretty well correlated (positively) with 10-Yr Treasury yields (see below). Pipeline MLP’s like Energy Transfer (ET) were possibly impacted a bit more by rising rates, but I still think that ARLP will rise in price even if inflation proves sticky.

Valuation

ARLP unit prices have solid upside. I use a DCF valuation and model 7% annual FCF growth over the next decade, which I think is conservative given the tailwinds of data center electricity load growth, followed by another decade of basically no growth (1%). I used a discount rate of 11%, just above WACC of 10.3%. That puts units at a value of near $31, which would be a nearly 20% gain from current levels. I think there’s upside above that too if we really have a power market crisis in places like MISO and PJM. The $31 price target assumes that a few more coal plants taking ARLP coal announce delayed retirements (adding somewhere around $50M in EBITDA/year that a coal plant stays online). But a strong move in gas or power pricing or more than 2-3 customers delaying coal plant retirements could add a couple dollars more to unit prices.