Refining Estimates; Outlook Remains Favorable

Third Quarter Negatively Impacted by Lower Coal Sales Volume and Higher Costs

Gaining a Toehold in the EV Battery Market

In-Line Second Quarter; Lowering Near-Term Estimates

Mark Reichman

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Energy

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Alliance Resource Partners L.P.

Updated Corporate 2023 Guidance
The table below summarizes the partnership&#8217;s updated guidance for key line items in 2023, along with the partnership&#8217;s prior guidance and our current estimates.

Alliance Resource Partners Updated 2023 Guidance
 
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Source: Alliance Resource Partners L.P. and Noble Capital Markets
Most of the refinements made to corporate guidance pertained to the partnershipâ€™s coal operations.&nbsp; No changes were made to expectations associated with the partnershipâ€™s oil &amp; gas or coal royalty businesses. Alliance anticipates 2023 coal volumes of 35.5 million to 36.0 million tons compared to previous expectations of 36.0 million to 38.0 million tons. Average coal sales price per ton is expected to be in the range of $65 to $66 compared to previous guidance of $65 to $67 driven by lower pricing expectations for the partnership&#8217;s remaining export tonnage. At the end of the second quarter, committed coal tonnage for 2023 was 34.5 million tons, of which 4.8 million tons are committed to the export market. Segment adjusted EBITDA expense per ton is expected to be in the range of $38 to $41 per ton compared to prior expectations in the range of $39 to $42 per ton. Depreciation, depletion and amortization, general and administrative expenses, income tax expense, and total capital expenditures were revised lower. 
Summary of Second Quarter Financial Performance
Alliance reported second quarter EBITDA and earnings per unit (EPU) of $249.2 million and $1.30, respectively, compared to $246.9 million and $1.23 during the prior year period. Compared with the prior year period, revenues increased 3.5% to $641.8 million due to higher coal sales price per ton which increased 5.7%, partially offset by lower oil and gas royalty prices. Income from operations increased to $183.9 million compared to $177.3 million during the second quarter of 2022.&nbsp;&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Coal Segment
Second quarter coal sales revenue increased 5.4% to $560.3 million compared to the prior year period. Coal tons sold declined 0.3% to 8.904 million tons, while coal sales price per ton sold rose 5.7% to $62.93. Illinois Basin tons sold rose 4.0% compared to the prior year period and prices increased 9.8%. Appalachia tons sold declined 8.5% compared to the prior year period although the average coal sales price per ton increased 3.5% to $80.52. Segment adjusted EBITDA expense per ton increased 7.8% to $37.85 due to higher labor-related expenses, higher maintenance costs, and increased sales-related expenses. Segment adjusted EBITDA expense increased 6.0% to $35.39 per ton in the Illinois Basin and increased 11.1% to $42.04 in Appalachia. Segment adjusted EBITDA increased 2.7% to $226.2 million compared to $220.2 million during the prior year period.
Compared to the first quarter of 2023, coal sales revenue declined 3.2%. Coal tons sold increased 5.1%, while coal sales price per ton sold fell 7.9%. Illinois Basin tons sold declined 2.0% while Appalachia tons sold increased 24.5%. Segment adjusted EBITDA expense per ton declined 4.6% driven by a 23.8% decline in Appalachia that was partially offset by a 5.8% increase in the Illinois Basin. Segment adjusted EBITDA declined 7.9% compared to the first quarter of 2023.
Oil &amp; Gas Royalty Segment
Second quarter oil and gas royalty revenue declined 15.8% to $33.1 million compared to $39.3 million during the prior year period. Oil and gas royalties experienced a 40.6% increase in barrels of oil equivalent sold although the average sales price per barrel of oil equivalent decreased 40.2% to $43.27. Segment adjusted EBITDA expense was flat. Segment adjusted EBITDA declined 22.8% to $29.1 million compared to $37.6 million during the prior year period.
Compared to the first quarter of 2023, oil and gas royalty revenue declined 4.1%. Oil and gas royalties experienced a 0.8% increase in barrels of oil equivalent sold although the average sales price per barrel of oil equivalent fell declined 4.7%. Segment adjusted EBITDA expense declined 19.5%. Segment adjusted EBITDA declined 3.3% compared to the first quarter of 2023.
Coal Royalties
Coal royalty tons sold declined 2.8% although revenue per royalty ton sold increased 17.4% to $3.24 per ton compared to the second quarter of 2022. Segment adjusted EBITDA expense increased 3.7% to $5.6 million, or $1.09 per royalty ton sold. Segment adjusted EBITDA increased 20.2% to $11.0 million compared to $9.1 million during the prior year period.
Compared to the first quarter of 2023, coal royalty tons sold increased 1.2% while revenue per royalty ton sold increased 5.5%. Segment adjusted EBITDA expense increased 3.7%. Segment adjusted EBITDA increased 8.3% compared to the first quarter of 2023. 
 
Conference Call Commentary
During the earnings call, management highlighted its planned uses for cash flow generated from its operations. These include: 1) balance sheet management and cash return to unitholders which includes sustaining the cash distribution at a rate of $0.70 per unit, or $2.80 on an annualized basis and paying down the partnership&#8217;s senior notes, 2) mining investment to maintain the efficiency of existing coal operations, 3) reinvestment cash flow generated by the oil and gas royalty segment to grow its business, 4) managed growth investments which includes supporting the growth of its wholly owned Matrix Design Group subsidiary, and 5) new ventures investment which encompasses high-potential investments into energy advancements and related infrastructure.
Matrix Design Group, headquartered in Newburgh, Indiana, develops, supplies, and supports technology that improves productivity and safety in industrial, energy, commercial, and mining environments. The companyâ€™s product suite encompasses atmospheric monitoring, mining equipment, camera and lighting systems, mining radio networks, data and analytics, and proximity detection and collision avoidance. In addition to supporting existing markets, we expect Matrix to expand into new sustainable growth markets. 
 
In 2022, Alliance formed a New Ventures team to identify, develop, and execute commercial opportunities outside of the companyâ€™s existing businesses to enhance growth and the companyâ€™s ability to serve the evolving energy needs of the market. During the earnings call, management indicated that new growth ventures would likely initially focus on energy solutions and related infrastructure, including batteries, storage, and other aspects of the battery and energy storage markets. With increasing demand for electricity, Alliance thinks the need for battery storage for the electric utility and industrial sectors will accelerate and has identified attractive investment opportunities which it plans to disclose later. Management elaborated on its investment parameters, including investing $25 million to $50 million per investment to make it sizeable enough that investments can generate an attractive return, while fostering and supporting new strategic relationships. The partnership would have the ability to scale up its investments. Based on the commentary, the partnership seems more focused on regions within its service territory such as Indiana, Kentucky, Ohio, and Tennessee.
Capital Structure and Liquidity 
 
As of June 30, 2023, Alliance Resource Partners reported cash and cash equivalents in the amount of $284.9 million and total debt in the amount of $417.2 million, including $339.2 million in ARLPâ€™s 2025 senior notes. The company generated distributable cash flow of $173.7 million and covered cash distributions paid to partners by 1.9x. Alliance ended the quarter with liquidity of $717.2 million, including $432.3 million of available capacity under its revolving credit and accounts receivable securitization facility. In July, Alliance redeemed $50.0 million of its 7.5% senior notes due 2025. As a result, the partnership ended July with $289.2 million aggregate principal remaining on the original $400 million issuance. Alliance can call all or any part of its senior notes at par value and management expects to execute additional purchases and redemptions at par of the senior notes with available cash flows during the next several quarters.
The partnership anticipates 2023 capital expenditures to be in the range of $390 million to $440 million, including maintenance capital in the range of between $350 million and $390 million.

Alliance Resource Partners L.P. (ARLP)

In-Line Second Quarter; Lowering Near-Term Estimates

Fundamental Analysis:

Rating: Log in to view

Refining Estimates; Outlook Remains Favorable (ARLP)

Third Quarter Negatively Impacted by Lower Coal Sales Volume and Higher Costs (ARLP)

Gaining a Toehold in the EV Battery Market (ARLP)

In-Line Second Quarter; Lowering Near-Term Estimates (ARLP)

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