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Alliance Resource Partners, L.P.'s Financial Results Slip on Lower Coal Prices

As expected, coal-producing MLP Alliance Resource Partners' (NASDAQ: ARLP) revenue and cash flow declined in the second quarter due to lower realized prices, as some of the company's legacy contracts rolled off into new lower price agreements. However, overshadowing those solid results was the announcement of two strategic moves aimed at creating long-term value for investors.

Leading the way was a transaction with the MLP's general partner Alliance Holdings GP (NASDAQ: AHGP), which eliminated the company's incentive distribution rights (IDRs) in exchange for additional common units. The transaction enabled both companies to increase distributions to investors.

Alliance Resource Partners results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$398.7 million

$439.2 million

(9.2%)

Distributable cash flow

$90.1 million

$116.6 million

(22.8%)

Distribution coverage ratio

1.69

2.20

(23.2%)

Data source: Alliance Resource Partners.

What happened with Alliance Resource Partners this quarter?

Alliance Resource Partners only partially offset lower prices.

  • Coal revenue slumped due to lower coal sales prices, which fell 14.9% versus the year-ago period to $45.15 per ton sold. Those weaker prices offset a 6.3% increase in coal sales volumes, which came in at 8.5 million tons for the quarter.
  • While cash flow followed revenue lower, the company partially offset that decline by cutting operating expenses 5.3% despite higher volumes.
  • Alliance Resource Partners announced the elimination of the IDRs held by Alliance Holdings GP, as well as the conversion of its general-partner interest into a noneconomic one in exchange for 56.1 million common units. As a result of that transaction, Alliance Holdings GP now holds 87.2 million of Alliance Resource Partners' 130.7 million outstanding units.
  • One result of that consolidation deal: It will free up cash flow that Alliance Resource Partners can distribute to investors. The MLP announced a 14.3% increase in its distribution to investors while Alliance Holdings GP boosted its payout by 32.7%.
  • Alliance Resource Partners also announced a diversification transaction. The company purchased a $100 million preferred interest in Kodiak Gas Services, a privately held natural gas compression company that operates in the prolific Permian Basin. The investment should generate steady cash flow for Alliance, providing more stability for its distribution.

Image source: Getty Images.

What management had to say

CEO Joseph Craft commented on the second-quarter results:

ARLP made significant strides this quarter toward achieving its goal of enhancing long-term value for our unitholders. ARLP's performance for the 2017 Quarter met our expectations and, with our outlook for the second half of the year intact, we continue to believe ARLP should deliver full-year results within our existing guidance ranges.

As Craft noted, there wasn't anything out of the ordinary this quarter. Instead, all the action occurred after the quarter ended when the company announced two strategic moves.

The first was an oil and gas deal; Craft said that "this immediately accretive $100 million investment is consistent with ARLP's previously stated objective of opportunistically deploying capital in the oil and gas sector to create sustainable growth in cash flow as a complement to our core coal business." What's noteworthy about this deal is that it's a preferred equity transaction, which enables the company to earn a high dividend yield, giving it cash flow to support its distribution.

Next, Craft commented on the deal with Alliance Holdings GP:

We believe this all-equity, tax-free Exchange Transaction should benefit ARLP in the future by lowering our cost of capital and creating flexibility for equity capital transactions by ARLP, whether in the form of additional common unit issuances if needed to pursue future growth opportunities or common unit repurchases, while maintaining our strong balance sheet and long-term distribution growth potential.

In other words, the company believes that deal will give it more flexibility and options as it seeks to grow value.

Looking forward

With results meeting expectations, Alliance Resource Partners was able to reaffirm its full-year guidance. As such, the company still expects coal sales volumes of 38.5 million to 39.5 million tons and revenue of $1.78 billion to $1.82 billion. Further, the company noted that it still anticipates spending $20 million to $30 million to acquire oil and gas royalty interests this year, as it continues to opportunistically deploy capital into that sector and diversify its revenue streams away from coal.

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