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Geological Issues Caused Alliance Resource Partners, L.P.'s Results to Fall Short

Coal-producing master limited partnership (MLP) Alliance Resource Partners (NASDAQ: ARLP) encountered "adverse geological conditions" at its Hamilton mine during the third quarter, which caused results to come in below expectations. However, the company partially made up for that issue by selling coal out of its inventory and the mine is now back up to its planned production levels. Because of that, Alliance still expects to meet its full-year guidance.

Alliance Resource Partners results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$453.2 million

$552.1 million

-17.9%

Tons sold

9.6 million

10.8 million

-10.3%

Coal sales price per ton

$45.12

$49.63

-9.1%

Distributable cash flow

$95.1 million

$150.8 million

-36.9%

Data source: Alliance Resource Partners.

Image source: Getty Images.

What happened with Alliance Resource Partners this quarter?

Alliance Resource Partners battled geological conditions and a tough comparable quarter.

  • Coal revenue declined due to lower coal sales prices and volumes versus the year-ago period. That said, results appear worse than they were because the company enjoyed a spike in coal sales and revenue in the year-ago quarter after it unloaded a significant portion of its inventory stockpile into an improving coal market. Overall, coal sales volumes and revenue were in line with the company's expectations heading into the third quarter.
  • However, production volumes fell short because of the issue at the Hamilton mine, which the company partially made up for by selling 1.1 million tons of coal from its inventory. As a result, the company missed its expectations for earnings and distributable cash flow. 
  • That said, Alliance Resource Partners continued to generate significant distributable cash flow and covered its payout to investors by more than 1.4 times during the quarter. Because of that, the company increased the distribution 1% this quarter and has now raised it 15.4% this year. That boost enabled its general partner Alliance Holdings GP (NASDAQ: AHGP) to grow its distribution another 0.7%. That brought Alliance Holdings GP's year-to-date increase to 33.6%. Both companies plan to continue boosting their payouts on a quarterly basis due to Alliance Resources' cash flow expectations and conservative balance sheet.

What management had to say

CEO Joseph Craft commented on the quarter by saying that,

Coal sales volume and revenue in the 2017 Quarter came in above expectations, reducing our inventories 1.1 million tons from the Sequential Quarter. ARLP's overall results fell short of our expectations, however, due to adverse geological conditions encountered at the Hamilton mine following a longwall move midway through the quarter. With the Hamilton mine recently returning to planned production levels, our solid year-to-date performance and expectations for a heavy shipping schedule over the balance of the year, we believe ARLP's 2017 annual results will finish in line with our previous guidance ranges.

Alliance's third-quarter results went up against an unfavorable comparable quarter where the company benefited from an uptick in the coal market, enabling it to capture higher prices as it unloaded volumes out of its inventory. That masks the fact that its results improved from last quarter as tons sold rose 13.9% while distributable cash flow was 5.5% higher. Because of that, and the Hamilton mine's recent return to planned production levels, the company remains on pace to hit its guidance targets.

Looking forward

Alliance Resource Partners has pre-sold its entire expected production for this year and continues working on securing additional contracts for future volumes. The company believes that current natural gas prices and coal inventory levels at utilities will lead customers to buy more coal in the near-term. Because of that, the company estimates that it will be able to secure enough commitments to support higher sales and production volumes in 2018.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Alliance Resource Partners. The Motley Fool has a disclosure policy.