Alliance Resource Partners, L.P. (NASDAQ:ARLP) Q1 2023 Earnings Call Transcript

Alliance Resource Partners, L.P. (NASDAQ:ARLP) Q1 2023 Earnings Call Transcript May 2, 2023

Alliance Resource Partners, L.P. beats earnings expectations. Reported EPS is $1.45, expectations were $1.26.

Operator: Greetings, and welcome to the Alliance Resource Partners L.P. First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Senior Vice President and Chief Financial Officer, Cary Marshall, you may begin.

Cary Marshall: Thank you, operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2023 financial and operating results, and we will now discuss those results as well as our perspective on current market conditions and outlook for 2023. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements subject to a variety of risks, uncertainties and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning’s press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected.

And in providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law to do so. Finally, we will also be discussing certain non-GAAP financial measures, definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP’s press release, which has been posted on our website and furnished to the SEC on Form 8-K. With the required preliminaries out of the way, I will begin with a review of our results for the first quarter then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his comments.

But first, let me briefly share how incredibly grateful I am for the opportunity to step into the role of Chief Financial Officer. I’ve called Alliance home for the past 34 years, having joined our predecessor company in 1989. Since then, I’ve served in a variety of roles within corporate finance and marketing, and I uniquely understand what makes this partnership great. and I see tremendous opportunity for continued value creation as we build upon Alliance’s strong financial operational foundation to be a reliable energy partner both for today and tomorrow. Now turning to the quarter. Let me start by recognizing the dedicated efforts of our entire team that delivered the impressive first quarter results we are going to talk about today. The strong 2023 quarter performance was led by record coal sales price per ton sold, which rose by 43.6% resulting in total revenues in the 2023 quarter increasing by 43% to $662.9 million compared to $463.4 million for the 2022 quarter.

The year-over-year improvement in realized coal prices reflects the positive impacts of our contracted order book. Sequentially, coal sales price per ton was up 0.7% or $0.50 per ton sold. Turning to our Royalty segment. Coal royalty revenue per ton was up 12.5%. However, lower commodity prices caused average realized oil and gas sales prices to fall 26% per BOE versus the 2022 quarter. Sequentially, coal royalty revenue per ton was up 14.6% and average realized oil and gas sales prices fell 18.2% per BOE. Coal sales volumes increased 3.8%, while coal production increased 0.7% to 8.5 million and 9.2 million tons, respectively, compared to the 2022 quarter. Oil and gas royalty volumes increased 39.5% on a BOE basis to new record highs, while coal royalty tons sold declined 8.9% year-over-year.

It is important to note that we recast historical periods within our oil and gas royalty segment to include the JC Resources LP minerals interest acquisition that closed during the 2023 quarter as if we, rather than JC Resources, had acquired the assets in 2019. Segment adjusted EBITDA expense per ton sold for our coal operations was $39.66, an increase of 23.7% versus the 2022 quarter, primarily due to inflationary pressures throughout the year. On a sequential basis, cost per ton were slightly lower. Our increased operating expenses in the 2023 quarter compared to the 2022 quarter were also impacted by increased sales-related expenses due to higher sales price realizations and higher labor-related expenses, maintenance costs and materials and supplies costs.

During the 2023 quarter, we had 3 longwall moves, including 2 at our Tunnel Ridge mine, which is an extremely rare event for us. These longwall moves along with 2 preplant fires that were contained and extinguished quickly, or some of the operational challenges that occurred during the quarter. Our net income and EBITDA rose sharply in the 2023 quarter, increasing 42% and 75.2%, respectively, over the 2022 quarter. These increases reflect higher sales volumes in both coal and oil and gas royalties as well as higher price realizations in coal, which more than offset lower realized prices in oil and gas royalties, inflationary pressures and other cost impacts that I previously described. Now turning to our balance sheet and uses of cash. Alliance generated $153.4 million of cash flow before growth investments in the 2023 quarter, which represented a 17.7% decrease versus the sequential quarter but an increase of 208.4% year-over-year.

The sequential decrease was primarily attributable to tons sold being 9% lower due in part to strong shipments during the sequential quarter and a slight delay in our scheduled contract shipments for the 2023 quarter. Our total net leverage ratios were 0.44 and 0.19x total debt to trailing 12 months adjusted EBITDA, and our liquidity increased to $703.6 million, including approximately $271 million of cash on the balance sheet. The 2023 quarter was eventful for us on the capital allocation front, highlighting both the cash generating power of ARLP and the many options we have to attractively deploy it. During the quarter, we paid our quarterly distribution of $0.70 per unit, equating to an annualized rate of $2.80 per unit that we expect to maintain throughout the year.

Our Oil & Gas royalty segment continues to be a valuable growth vehicle for Alliance as we completed the $72.3 million acquisition of oil and gas mineral interest discussed on the last call and then separately purchased additional oil and gas mineral interest in the Permian Basin for $2.8 million during the quarter. In January, we announced that the Board had authorized a $100 million unit buyback program. During the 2023 quarter, we deployed $18.2 million to purchase 860,000 units leaving us with $81.8 million of remaining authorization on our unit repurchase program, which has no expiration date. Finally, in March, we opportunistically purchased $26.6 million of our outstanding 2025 senior notes in the open market slightly below par. We intend to prioritize additional purchases with available cash flows this year and next.

And as of yesterday, May 1, we now can call all or any part of our senior notes at par, one of several options we will consider. So like I said, a busy quarter for capital allocation. The slowing of the economy and the mild start to winter reduced overall demand for both coal and natural gas in the United States during the 2023 quarter. Coupled with continued growth in domestic natural gas production, natural gas prices dropped significantly, both sequentially and relative to the year ago quarter. Lower natural gas prices affected coal burns due to more competitive gas-fired dispatch options for some of our customers and to a lesser extent, reduced realized pricing in our oil and gas minerals segment. Despite these near-term challenges, we remain optimistic 2023 will be another record year for ARLP based upon the strength of our solid contracted coal sales book of business.

Now turning to our updated guidance detailed in this morning’s release. Lower natural gas prices have resulted in some movement in the timing of contracted domestic deliveries and a shift in the mix between export and domestic markets. At the end of the 2023 quarter, our committed tonnage for 2023 was 34.3 million tons or approximately 93% of our anticipated sales tons at the midpoint of our guidance range. Of that total, 4.2 million tons are currently committed to the export markets. As we discussed during our call last quarter, we anticipated that most of the sales activity for our unsold coal for 2023 would occur in the back half of the year, and that remains the case today. We do now expect that most of this available tonnage will be supplied to the export markets as domestic opportunities appear more limited due to the mild winter weather and current utility inventory levels.

As the summer peak demand season plays out, we expect normal buying patterns to return. Sales pricing is anticipated to be lower than where we thought at the beginning of the year, so we have chosen to modestly adjust our outlook for average coal price realizations for 2023. We continue to anticipate ARLP’s overall coal sales volumes in 2023 to be in a range of 36 million to 38 million tons. 2023 total coal price realizations per ton sold are now expected to be in a range of $65 to $67 per ton, a decrease of $2 per ton from our previous range, driven by lower pricing expectations for our uncontracted tonnage position. On the cost side, a laser focus on execution is helping offset the inflationary factors experienced in 2022, but we still anticipate labor pressures, higher maintenance, materials and supplies costs and higher sales-related expenses throughout 2023 compared to 2022.

On our last call, we stated that we expect segment adjusted EBITDA expense per ton to be higher during the first half of 2023 compared to 2022 levels before moderating in the back half of the year. And that outlook still holds. For the 2023 full year segment adjusted EBITDA expense per ton is now anticipated to be in a range of $39 to $42 per ton, a decrease of $0.75 per ton at the midpoint from the prior guidance range. And finally, as it relates to our oil and gas royalty segment, our initial 2023 guidance reflected the acquisition of mineral interest and 2,682 net oil and gas royalty acres in the Permian Basin for a cash purchase price of $72.3 million, which closed during the 2023 quarter. Recent performance on all of our acreage has exceeded our initial expectations, leading us to increase the midpoint of full year guidance for oil and gas volumes on a BOE basis by approximately 9%.

The remainder of our guidance ranges remain essentially the same as previously discussed, with only minor adjustments in certain categories. With that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Joseph Craft: Thank you, Cary, and good morning, everyone. Before I start, I would like to express my appreciation to Brian Cantrell for his dedication to me and our partnership over the past 2 decades. I can tell Brian is already enjoying his retirement as he sent carrying me an e-mail this morning after we posted our earnings release, which he said, “Outstanding first quarter, congratulations. I’m sure you’ll do well on the call today.” So many of you know Cary, who has been by my side for nearly 3 decades. And I’m so appreciative of him enthusiastically agreeing to step up and assume the role of CEO. Cary, I welcome you to the call, and think it’s time to get ready. Yes. You’re ready to go. So like Cary said earlier, I also want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication toward posting outstanding results to start 2023.

Their efforts helped us deliver year-over-year improvements in coal production, coal sales volumes, record realized coal prices record royalty oil and gas volumes and ultimately, higher net income and EBITDA. We I’m extremely proud of all that has been accomplished and thankful for the unwavering focus of our teams on creating long-term value for all of our stakeholders. Overall, this winter season was a mild one for our markets in both the United States and Europe, which makes it easy to forget the impact that severe weather events like December’s winter storm Elliott, can have on our nation’s energy security as well as the importance of having a reliable, diverse affordable energy mix. It is during these extreme weather events that renewable resources as well as natural gas are frequently unable to adequately respond at the times they are most needed.

Deserve margins in energy security in many regions of the country and in Europe are already tight. And as economies continue to recover and advance initiatives to increase electrification, the demand and stress on the grid will likely be even more magnified going forward. There is a critical need for a diverse mix of energy sources for decades to come. And time and time again, we have to remind stakeholders that the speed of transition away from all fossil fuels as advanced by the Biden administration is moving way too fast, is not practical and will lead to energy and security if they keep trying to prematurely shutter fossil fuel power plants. Turning to our current outlook. Cary did a good job outlining our views on the current weakness in domestic coal demand caused by lower natural gas prices and how our guidance was adjusted as a result.

As he stated, we remain optimistic 2023 financial results will be at record levels. Even though the uncertainty caused by rising interest rates impacting the U.S. economy, and recent mild weather and lower natural gas prices that soften the near-term domestic utility markets, we expect export demand to be sufficient to allow us to increase sales compared to last year. Relative to pricing, domestically, the market views the weakness in natural gas prices is temporary condition. As evidenced by the current forward curve rising steadily to over $3.50 per MMBtu by the end of 2023 and into 2024. We support that view as natural gas prices must rise to incentivize new capital investments. From a pricing perspective in Europe, mild weather caused API2 thermal delivered prices that peaked near $270 per ton in November to a pricing range today in the $125 to $150 per ton range.

I will emphasize that even in the face of this decline, seaborne thermal coal prices for our key markets are still an attractive option for our tonnage. We are fortunate that our robust cash flow generation positions us to continue improving our balance sheet and pursue attractive investments that are intended to meet the evolving energy needs of tomorrow. We are not just a coal company. Our successful investments in oil and gas minerals interest in the last several years, along with the additional growth opportunities within our new ventures activities demonstrate our commitment to diversify our earnings and cash flows and grow ARLP in parallel with the transition underway in the energy markets we serve. ARLP has long-standing relationships with electric utilities, regulators and other customers that position us to be a reliable energy partner of tomorrow and benefit from any changes to the U.S. power grid, creating additional avenues for growth.

As I’ve said many times before, we do not view our future energy needs as a country as an either/or solution, but rather an and solution. In closing, I am proud of ARLP’s impressive first quarter results and excited about the opportunities in front of us. Our operations are running well. Our coal contract book is heavily committed at attractive levels, and our financial position has never been stronger. Looking forward, we believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unitholders in 2023 and beyond. That concludes our prepared comments, and I will now ask the operator to open the call for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Nathan Martin Benchmark Company.

Operator: Our next question comes from the line of Mark Reichman with NOBLE Capital Markets.

Operator: Our next question comes from the line of Dave Storms with Stonegate.

Operator: Our next question comes from the line of David Marsh with Singular Research.

Operator: Our next question comes from Nathan Martin with Benchmark Company.

Operator: And we have reached the end of the question-and-answer session. And I’ll now turn the call back over to Cary Marshall for closing remarks.

Cary Marshall: Thank you, operator. And to everyone on the call, we appreciate your time this morning as well and also your continued support and interest in Alliance. Our next call to discuss our second quarter 2023 financial and operating results is currently expected to occur in late July, and we hope everyone will join us again at that time. This concludes our call for the day. Thank you.

Operator: And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.