A Closer Look: Alliance Resource Partners (ARLP)

Holding Name: ARLP

Strategy: Opportunities

Percent weighting of strategy: ~9% as of August 25, 2022

Date first invested: April 28th, 2022

TLDR: Alliance Resource Partners' (ARLP) strong earnings results, underpinned by the strong, accelerating growth within its coal division and ability to sign larger than expected contracting volumes at higher than expected prices provide further confidence of our investment thesis tracking as expected.

Why we own it: Alliance Resource Partners (ARLP) is a special situations investment opportunity that we believe may offer a highly asymmetric risk/reward proposition for Titan clients. Given the what we believe to be a compelling valuation, its unique operating structure, and long-term contracting agreements, we believe ARLP is well positioned for growth over the medium term. 

ARLP operates through a Master Limited Partnership (MLP) structure which requires the company to return excess cash flow back to shareholders with current yields of ~6%+ per year in the form of cash distributions. After prudently cutting its dividend during the pandemic to reduce risk and de-lever its balance sheet, ARLP’s management team has been able to capitalize on the strong price environment and secure 3-year contracts at prices 100%+ higher than prior years (vs typical contracts ranging between 9-12 month duration). 

Against this backdrop, these newly signed contracts and lucrative economics may enable ARLP to meaningfully increase its free-cash-flow and increase its payout ratio back to historical 100% levels. As such, we have conviction that ARLP's share price may more than double over the next 2-3 years, translating to 25%+ IRRs alongside a large margin of safety with its expected 15%+ dividend yield.

Business overview: Alliance Resource Partners is a diversified natural resource company that generates revenue from the production and marketing of coal, as well as the royalty income from oil, gas, and coal across several mineral interests. ARLP operates in strategic producing regions in the United States which include Illinois and Appalachia. 

What’s the latest: ARLP reported strong earnings results in early August that beat nearly all sell side estimates across the board. Importantly, ARLP delivered revenue/earnings growth which accelerated +70% YoY and +266% YoY, respectively, on the back of strong pricing dynamics (+43% YoY) and increased volumes sold (+14% YoY). These solid operating results, combined with the company signing nearly 25M tons in new contracts through 2025, enabled management to increase its full-year revenue/pricing guidance as well as increase its payout ratio by 14% to $0.40/share.

Sign posts moving forward: As inelastic demand coincides with limited supply amidst the global energy crisis, we believe coal prices may continue to see increased upward pricing pressure for the next few years. We believe this may create powerful tailwinds for ARLP and its ability to increase its payout ratio back to 100% levels.