Peabody Energy Corporation (BTU), Alliance Resource Partners, L.P. (ARLP): Coal, Costs, and Profits

Although the company’s reliance on Central Appalachian coal is a competitive disadvantage, the partnership’s toll taker model and increasingly diversified business make it a solid option in the coal arena.

In fact, despite the weak coal market, the partnership was able to increase its distribution in 2012. While it hasn’t upped the payout in six quarters, the fact that it also hasn’t cut the payment is a sign of strength in a weak industry.

Less central, but more risk

About a third of Rhino Resource Partners, L.P. (NYSE:RNO)’ direct 2012 coal production came from Central Appalachia mines. While that’s a lower number than Natural Resource Partners, Rhino is taking on the risks of operating its own mines. Rhino has also been diversifying its business, however.

For example, it has a large coal leasing businesses and has been particularly aggressive in its push into natural gas. So, even if its Central Appalachia coal is at a disadvantage, Rhino will benefit from increased use of natural gas.

On the surface, Rhino hasn’t handled the coal market’s rough patch as well as either of the two limited partnerships above. It cut its limited partnership distribution and stopped paying incentive distributions to its general partner (GP). While this can be looked at in a negative light, there’s a silver lining. The decision by the GP to stop taking incentive distributions was in support of growth projects.

That includes the push into natural gas and the development of a well-situated Illinois Basin property. Rhino is looking to start increasing distributions once that project is complete. The shares yield around 13.8%.

High risk high reward

Coal is unloved and facing serious threats. Eventually, however, the industry will recover. Alliance Resource Partners, L.P. (NASDAQ:ARLP) is among the best options in the space. However, Natural Resource Partners and Rhino Resource Partners are both growing businesses that are paying you to wait for a coal rebound while, at the same time, diversifying into stronger sectors.

Reuben Brewer has positions in Rhino Resource Partners and Natural Resource Partners. The Motley Fool recommends Alliance Resource Partners, L.P.

The article Coal, Costs, and Profits originally appeared on Fool.com and is written by Reuben Brewer.

Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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