Q2 2021 Alliance Resource Partners LP Earnings Call
[music].
Thank you for your patience the conference will be getting and just a few moments and we wanted to thank you for your patience.
[music].
Greetings and welcome to Alliance Resource Partners L. P second quarter 'twenty 'twenty 1 earnings conference call. At this time, all participants are in a listen only mode.
And and answer session will follow the formal presentation and.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
I'll now turn the conference over to Mr. Brian Cantrell Senior Vice President and CFO. Thank you you may begin.
And thank you Sherry and welcome everyone.
Earlier. This morning Alliance resource partners released its second quarter 2021 financial and operating results and we will now discuss these results as well as our perspective on market conditions and outlook.
Following our prepared remarks, we will open the call to your questions.
Before we begin.
A reminder, that some of our remarks today may include forward looking statements.
Through a variety of risks uncertainties and assumptions that are contained in our filings from time to time with the Securities and Exchange Commission and.
And are also reflected in this morning's press release.
While these forward looking statements are based on information currently available.
Begin.
If 1 or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect. Our actual results may vary materially from those we projected or expected.
And providing these remarks the partnership has no obligation to publicly update or revise any forward looking statement whether as.
2 out of new information future events or otherwise unless required by law to do so.
Finally, we'll 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.
As a result 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'll begin with a review of our results for the quarter and then I'll turn the call over to Joe craft, Our chairman President and Chief Executive Officer for his comments.
LP So as we reported earlier this morning Alliance delivered strong results during the 2021 quarter posting significant increases to our major operating and financial metrics compared to the sequential quarter.
Reflecting improved performance from both our coal operations and our royalty segment total revenues increased 13.
9.8% to $362.4 million net.
Net income jumped 77, 9% to $44 million.
Or <unk> 34 per unit and EBITDA climbed 25, 7% to $118.6 million.
Contributing to these exceptional results.
Shipment of tons delayed during the sequential quarter.
If you recall our release from last quarter shipments for 950000 tons were delayed by weather related transportation disruptions and.
And unplanned customer outage, which impacted our cash flow and EBITDA by approximately $13 million.
At that time.
What was anticipated customers would make up these plans over the balance of this year.
With strong power demand and utilities, calling on coal to meet this demand.
<unk> of delivering these delayed shipments was largely accelerated into the 2021 quarter.
Absent these timing issues results for the 2021 and sequential quarter.
We it would have been comparable.
With these increases and our continued focus on controlling costs expenses and capital.
Our LP generated $779.4 million of free cash flow and the 2021 quarter.
We utilized this cash flow to returned $12.7 million to unit holders through.
Quarterly distribution and to reduce total debt and finance lease obligations by $59.5 million.
We ended the quarter with liquidity of $505 million and reduced our total leverage to 1.8 times to 32, 1% improvement since the beginning of this year.
Arlp's financial and operating results for the 2021 quarter and the first half of 2021 were significantly improved compared to the 2020 quarter and period, which were negatively impacted by the pandemic.
Impaired to the 2020 quarter total revenues increased 42% and the 2021 quarter.
And our core while net income jumped by $97 million and EBITDA climbed 145, 9%.
For the 2021 period coal sales volumes increased 18% compared to the 2020 period.
Driving total revenues higher by 12, 4% to $681.1 million.
<unk>, reflecting ongoing cost control and efficiency initiatives and our mining operations.
Offset in part by increased selling expenses, resulting from higher coal sales volumes.
Operating expenses declined to $409.6 million for the 2021 period compared to $421.5 million.
2020 period.
Net income increased $262 million to.
And the $68.8 million for the 2021 period.
Reflecting higher revenues reduced operating expenses, lower depreciation and a $157 million of noncash impairment charge.
For those incurred and the 2020 period.
Excluding the impact of these impairment charges net income of $68.8 million for the 2021 period compares to on adjusted net loss of $34.4 million for the 2020 period.
EBITDA for the 2021 period increased.
Charge of 5.3% to $212.9 million.
Compared to adjusted EBITDA of $146.5 million and the 2020 period.
Turning from our consolidated results, let's now take a closer look at the performance of Arlp's business segments.
At our coal on.
And 40 million sales tons increased 14, 9% during the 2021 quarter as strong coal demand allowed us to deliver approximately 1 million tons of coal shipments delayed from the sequential quarter as I discussed earlier.
Increased coal sales volumes more than offset lower price realizations, leading.
Operational sales revenues higher by 13, 4% to $326 million compared to the sequential quarter.
Increased volumes and the continued benefits of ongoing cost control and efficiency initiatives at all ARLP coal mines drove segment adjusted EBITDA expense per ton sold lower.
<unk> <unk> $27.90.
A 6.1% reduction compared to the sequential quarter.
Increased revenues and lower per ton on operating expenses drove segment adjusted EBITDA for our coal operations higher by 25, 7% to $113.9 million.
Today, our Lp's royalty business has also performed well during the 2021 quarter delivering $22.2 million of segment adjusted EBITDA and.
And increase of 15, 3% over the sequential quarter.
Of this total oil and gas royalties contributed $15.4 million.
Segment adjusted EBITDA during the 2021 quarter, a sequential increase of 28, 7% on the strength of significantly higher commodity prices.
As expected coal royalties delivered relatively stable results for the 2021 quarter.
Posting segment adjusted EBITDA of $6.8 million.
<unk>.
With that I'll now turn the call over to Joe Joe.
Thank you Brian.
And as Brian mentioned, Arlp's operating and financial performance for the 2021 quarter improved significantly compared to both the sequential and 2020 quarters.
Looking.
Head.
Coal market fundamentals are extremely favorable both at home and abroad.
Prompting us to increase our full year 2021 guidance.
We are increasing the midpoint of our targeted total total coal sales and volumes for 2021.
1.8 million tonnes.
Looking at for approximately 6% to $32.9 million tonnes.
Over the past 2 months commodity prices for each of our business segments have skyrocketed and.
And our primary U S markets year over year power demand has surged 7.5% through the first half of 2020.
1 <unk>.
Rising natural gas prices have driven coal consumption higher for the 2021 period.
According to Argus June coal generation and the PJM hit a 3 year high while MISO and SPP grids reported increased coal demand of 37% and.
<unk>, 2% respectively.
And for the full year coal consumption and the U S is expected to rebound and 16%.
Increased domestic demand is coming amidst declining utility stockpiles and constrained supply response, and a robust export market.
International co to manage.
And 40 rising as global economic expansion post COVID-19 is lifted power demand and higher LNG prices have favored coal generation.
IHS Markit and are currently projects U S. Thermal coal exports will climb to the range of 41% to 45 million short term short tons.
And as this year compared to $26.7 million short tons in 2020.
Alliance has responded to these favorable market conditions by significantly strengthening our contract position during the 2021 quarter.
Booking new commitments to deliver $8.7 million tonnes.
<unk> 2024, including $2.5 million tons into the export markets.
For 2021, we are targeting export sales volumes at $4.4 million tonnes compared to a little less and 1 million tons last year.
We are actively evaluating opportunities to further.
<unk> production and sales and response with expectations for continued strong coal demand and pricing through 2022.
However, the current tight labor market and May limit, what we can accomplish in this regard.
Market fundamentals for Arlp's royalty businesses are also favorable.
Other income increased coal sales volumes from Arlp's mining operations should benefit our coal royalty segment and we are raising the midpoint of estimated 2021 royalty tons sold by 3.3%.
For our oil and gas royalty segment drilling and completion activity continues on our.
<unk>.
With 103, new gross horizontal wells spud and 182 gross horizontal wells and brought into production during the 2021 quarter.
As a result, we are again, increasing our 2021 full year oil and gas production expectations.
Arlp's.
Acreage oil and gas price realizations have increased throughout the year and the current forward price curve remains strong.
But the expectations and increased oil gas and coal production and strong commodity pricing. We believe the contribution of our royalty segment of Arlp's consolidated results and we will continue to grow.
And with our strong year to date performance and positive outlook ARLP is well positioned to pursue our <unk>.
<unk> and optimizing the cash flow and value of our existing assets and pursuing growth opportunities that we believe has the potential to generate attractive returns.
That concludes our prepared.
<unk> comments and I'll now ask the operator to open the call for questions.
Thank you Andy we'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the Q you May press star 2 and we'd like to remove your question from the queue and.
And for participants.
And the speaker equipment may be necessary to pick up your handset before pressing the star keys. Our first question is from Nathan Martin with benchmark. Please proceed.
Hey, good morning, gentlemen, congrats on the quarter. Thanks.
Thanks, Nick and thank you.
I guess first just I'll start with question on incremental.
And it looks like you guys committed and priced and additional about 3 million tons and the domestic side and other change orders on exports on for 'twenty 1.
The last quarter and you can.
Give us a sense maybe on on pricing on those accounts.
Some of that timing as was before this recent price.
Price up but.
And we're able to get some of it on the back end.
We have factored that and 2 are increased.
Pricing on.
And our guidance, where we increased the bottom.
The lower end of the range on our average sales price. So when you look at the.
Price right.
And I think that raises the price around 50 ton for all times that helps you and understanding.
The increase in revenue for the year on a sales price basis.
Okay. Thanks, Joe.
And I guess, you mentioned pricing, we've had that reached and Kris.
The mid point based on what Im seeing out there and Illinois based on prices and to be up and maybe $7 Justice and law or like the mid forty's reward al and that prices are.
$50, plus and if you add 2 is $130 plus upfront lump. So does that kind of similar to what you guys are seeing and the market as well.
Yes.
And then really hard right now and there are people that are interested and the volume trying to price and volumes.
For the back half and.
And there is limited coal available and if you look at our.
<unk> open position.
This quarter, and we were right at that and $1.8 million or excuse me and $1.4.
And it sounds I believe and we're right now, we're probably 1 million tons that we have to sale.
So we are seeing pricing and net level and the current timeframe.
And as you look at the fourth quarter.
Some people were suggesting that price would go lower I don't really see that Adam.
Millions and how there can be inventory restocking and given the tight supply.
And the domestic market. So I think the pricing is going to remain very strong for the back half of this year and rolling into the first quarter.
So we will see exactly whether.
And these.
So these will in fact.
Transact at these price levels are.
Whether they will just continue to draw down inventory, which also has been.
Significantly reduce since our last call.
We are in interesting times.
Yeah.
Got it I appreciate that and then I guess just.
Utility pricing does kind of remain at these levels, Joe as you point out and hopefully through the back half of the year into next year maybe.
And maybe Brian or Joe can you comment.
On a potential priority share your free cash flow.
So as we're thinking about.
And what those would be.
And we will.
We're not and positioned to tell you exactly right now because there's so much uncertainty as to what the price is going to be next year.
When you look at most of the curves. They are very heavily backward dated for next year as I. Just mentioned, we think theyre going to be higher than what the.
From what.
And what the different indexes are showing but it's.
Until we see more.
More certainty in that regard.
It's hard to respond to exactly what our cash flow.
Capital allocation and youre going to be going into next year.
We'll be prepared.
And our next call to have better clarity on that.
And we will be able to address that at that time.
Okay I appreciate that.
I guess, just real quickly and looking at the cost side.
Fantastic cost quarter for you guys, especially in Appalachia.
So we own obviously, you've tightened your full year cost guidance look like.
It does seem to imply some kind of cost creep and the second half.
And we're also combining that with it looks like the shipments should be up and the second half versus the first half price based on your guidance. So maybe just some color on that potential increase in costs.
Okay.
And the experienced some pressure inflationary pressures.
Steel.
With.
Oil.
Labor.
And availability. So there is some pressure from an inflationary standpoint.
And the second half and we also have a longwall move.
We.
Our FTE operation and.
And the next quarter that.
Is built into that we've got submit shipments next quarter that are higher cost.
And then what we experienced in the second quarter and <unk>. So that's weighing.
And on the cost side, but on the flip side with the increased production.
And that production is primarily coming from our lowest cost mines, so youre seeing a blend to where we're still.
Able to maintain and our cost at levels.
Consistent with what we projected the beginning of the year notwithstanding.
And some of the inflationary pressures.
That we are experiencing main question are those transitory or not.
And we've had some feedback on.
On the steel side that was suggesting.
The steel surcharge.
We have been living with now.
And the month or so.
And we will follow will continue through the end of the year.
We will more than likely be lifted sometime in the first quarter and based on current projections.
Next year.
Great and just just to clarify Joe and you mentioned and longwall move at that.
For next quarter are you, saying fourth quarter or are you, saying third.
And third quarter so yes.
Yes.
Got it I appreciate it guys and then just 1 last final final question I noticed you raised your capex budget by about 5 site and.
And just elaborate on maybe on what's what's driving that small increase that's all thanks.
And I think.
And on the Brian you have the details on that I think the fact that our production is increasing.
And this capital will be a bit higher.
Over the back half of the year than we originally anticipated.
But to your point Nate.
A relatively minor increase and we're just trying.
<unk> net increased production level.
Perfect Hi, guys again always and I appreciate the time and vessel.
Look on third quarter.
Thank you.
Our next question is from Matthew fields with Bank of America. Please proceed.
Hey, everybody.
Okay.
And to reflect that you're still seeing a little bit of uncertainty and.
Futures prices to talk up too detailed about capital allocation, but.
You've historically talked about 1 times leverage is kind of a comfortable level for you all and you hit it this quarter. So just wondering kind of where you think about.
Accretion on forward are you comfortable kind of.
Yes here do you want it you want to take that 1 times leverage and and maybe take it lower or.
Are we going to see increased use for investment and shareholder returns now that you've hit that bogey.
Yeah, I mean, we're continuing to focus.
And a significantly on growth.
And there are several opportunities.
Pursuing as we speak.
So I think growth continues to be in front of our mind.
Thanks.
Paying down debt.
And we pay down more than we.
<unk> based.
Based on our strong performance and the first half.
And we will continue to do that and I think we will re.
And we look at the distributions as we think about.
Okay.
What our cash flows will be in 2022.
Starting probably in the next at our next meeting so we will.
And more clarity on that but.
Our target has always been at a 1 time level.
If we do these acquisitions everyone on we're looking at are accretive.
However.
It could pop up our coverage ratio for a small time, but we would be focused on maintaining.
Tobacco onetime level.
Target and.
So the key question and again is back to what our commodity price is going to be and what kind of volume can.
And we bring to the market in 2022 going forward.
So we are.
Again labor.
And as short and it's tight.
And I don't know when.
The federal.
Additional benefit vs.
Removed and September whether that's going to help.
And this infrastructure.
The infrastructure Bill Thats passed and then there is more.
Stimulus, what thats going on due to labor demand.
And I've never seen anything like it in my career to where you get.
Plenty of jobs and yet you still have people that are on.
On the unemployment rolls.
Not wanting to work so.
And hopefully we'll get back to encouraging.
And people to make and economic contribution to our country and get back into the labor pool.
So we can take advantage of these opportunities.
Alright, Thanks, and speaking of labor.
<unk> seen on kind of a pickup in and kind of union activity and the steel sector.
1 of your fellow coal miners and Alabama is going.
And over 100 days on the strike now can.
Can you just talk about kind of when you have.
Collective bargaining agreements coming due what are the how.
How are the relations with your Union workers and kind of what you expect to see.
We're continually and labor force and the months so were non union operator, and so we've been union free since inception and $19.71.
So we do we do not have any labor contracts.
And we're very focused on.
Having a culture.
<unk>.
And the focused on trying to have great relationships with our employees and.
And we continue to do that by constant communication and.
So as I mentioned.
There is a shortage, where and we would like to be able to growth and.
And unfortunately.
And it's tough sign and people, who want to enter and coal business right now.
And in large part because of all of that.
News headlines I believe and.
And we're trying to.
Convince our customers too.
Come forward and enter into longer term contracts or at least.
And give a shout out.
To our employees.
And let them know that they are needed for the next 2 decades, and we were able to today on 1 of our customers do that last Friday and it.
It was very well received.
So.
From a labor.
Her perspective on our key issue is just trying to ensure our employees and any prospective employees that they've got a future and.
And co industry for the next 20 years and.
And I believe they do.
But.
It would be nice if we can get some further commitments from our customer.
Base that reinforces.
That long term view for employees.
Alright, great. That's that's very helpful and good luck on the rest of the year.
Thank you.
As a reminder, the starwood on your telephone keypad, if you would like to ask a question. Our next question.
Question is from Bill discharge.
Atlas and merchant capital. Please proceed.
Hey, guys congrats on a great quarter.
Thank you Bill good morning.
Good morning can.
Can you discuss a little bit about the investment you've made historically into the royalty portfolio, specifically oil and gas.
I think you added to that.
You added to that exposure and a <unk> 19, and and I don't think we've really seen the full EBITDA or free cash flow potential.
And maybe discuss also what you what you think the standalone value of that might be just based on what youre seeing and the market for valuations.
Yes.
Standalone value if you look at the other.
Pure play oil and gas royalty companies.
Youre seeing trading multiples.
And the high single digits low double digit type area.
So if you look at our.
Current expected.
Cash flow out of our royalty business.
You can do the math.
Sure.
Clearly not and our view getting the full value for the cash flow that those assets are bringing bringing to the table.
At our current EBITDA this quarter of $22.2 million.
Run rate close to $80.85 million.
And the math is pretty compelling in terms of what the overall value is and.
You are correct, we have not made additional investments and that since late 2019.
Obviously, the with the market collapsed.
Apps during the pandemic.
Cessation of drilling shut and a production et cetera.
Availability of.
Assets at that point and time really just straight up.
We are beginning to see.
Increased activity as commodity prices have improved.
As we mentioned in our prepared comments drilling activity.
While not back to pre pandemic levels has certainly picked up.
And we're hopeful we are seeing opportunities.
Come across our desk that may make some sense.
And we're hopeful as that market continues to reopen.
Open that we will be able to transact.
Itself. Thanks.
You bet Bill Thank you.
We have reached and of our question and answer session I would like to turn the conference back over to Brian Cantrell for closing comments.
Thank you Sherry.
We appreciate everyone's time this morning, as well as your continued support of and interest and alliance.
Our next call to discuss our third quarter 2021 financial and operating results is currently expected to occur in late October and we hope youll join us again at that time.
This concludes our call for today, thanks to everyone.
Everyone for your participation.
Yes.
[music].
And.
[music].