Q2 2023 Alliance Resource Partners LP Earnings Call
Greetings and welcome to Alliance Resource Partners L. P second quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to carry Marshall Senior Vice President and Chief Financial Officer. Thank you you may begin.
Thank you operator and welcome everyone.
Earlier. This morning Alliance resource partners released its second 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.
In providing these remarks the partnership has no obligation to publicly update or revise any forward looking statement.
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.
Form 8-K.
With the required preliminaries out of the way I will begin with a review of our results for the second quarter, then turn the call over to Joe craft, Our chairman President and Chief Executive Officer for his comments.
Our strong performance in the 2023 quarter included consolidated revenues of $641 $8 million, which were up three 5% versus the prior year period.
The year over year improvement was driven primarily by higher coal sales price per ton, which was up five 7% versus the 2022 quarter and continues to reflect the positive impact of our contracted order book.
On a sequential basis total coal sales price per ton was down seven 9% or $5 41 per ton.
This was primarily due to approximately 500000 higher priced 2022 carryover tons shipped in the sequential quarter at our tunnel Ridge mine in Appalachia.
And our royalty segment total royalties were $50 million down eight 3% year over year and down two 1% sequentially as lower realized oil and gas commodity pricing was partially offset by increases in coal royalty revenue per ton.
Specifically oil and gas royalties average realized sales prices declined 42% per Boe versus the 2022 quarter as Nymex <unk> benchmark pricing peaked during June 2022.
Sequentially oil and gas royalties average sales prices were four 7% lower per Boe.
Coal royalty revenue per ton increased 17, 4% versus the 2022 quarter and five 5% sequentially.
As it relates to volume coal production increased five 8% to $9 4 million tons compared to the 2022 quarter, while coal sales volumes decreased <unk>, 3% to $8 9 million tons, resulting in a build in coal inventories of 500000 tons during the 2023 quarter.
Compared to the sequential quarter coal sales volumes increased five 1% due to higher sales volumes in Appalachia there.
No longwall moves at our tunnel Ridge mine in Appalachia This quarter, whereas we had two moves in the sequential quarter.
Coal royalty 10 sold declined two 8% year over year oil and gas royalty volumes were 46% higher on a Boe basis due to increased drilling and completion activities on our net acreage in the acquisition of oil and gas mineral interest from Jason Belvidere during the second half of 2022.
Turning to costs segment, adjusted EBITDA expense per ton sold for our coal operations was $37 85.
An increase of seven 8% versus the 2022 quarter, primarily due to higher labor related expenses higher maintenance cost as well as the impacts of increased sales related expenses due to higher sales price realizations. These.
These costs were partially offset by lower materials and supplies expenses during the 2023 quarter.
On a sequential basis cost per ton were four 6% lower primarily on the strength of the additional Appalachia volumes from our lower cost tunnel Ridge mine.
2023 quarter net income and EBITDA increased three 8% and 1% respectively over the 2022 quarter, primarily due to higher price realizations and coal was more than offset lower realized prices in oil and gas royalties along with inflationary pressures I previously described.
Now turning to our balance sheet and cash flow Alliance had another strong quarter of cash generation with a $153 5 million of free cash flow before growth investments in the 2023 quarter, an increase of 88, 7% year over year, and nine 7% versus the sequential quarter.
Our total and net leverage ratios were 0.4, and 0.14 times, respectively total debt to trailing 12 months adjusted EBITDA.
Total liquidity of $717 2 million remained strong at quarter end, which included approximately $284 9 million of cash on the balance sheet.
Our robust cash generating power is affording us many options to attractively deploy capital during.
During the 2023 quarter, we paid our quarterly distribution of <unk> 70 per unit equating to an annualized rate of $2 80 per unit that we expect to maintain throughout the year.
This distribution level is unchanged sequentially and up 75% year over year.
Additionally, we remain committed to prudently managing the outstanding balance of our senior notes due may 2025.
During the 2023 quarter, we repurchased $34 2 million of senior notes in July 2023, we redeemed another 50 million of senior notes at par.
As a result, we ended July with $289 2 million in aggregate principal remaining on the $400 million original issuance, we intend to execute additional purchases and redemptions at par of the senior notes with available cash flows over the next several quarters.
As we turn to our updated full year 2023 guidance detailed in this morning's release I'd like to spend a few minutes discussing the current state of our markets as we mentioned earlier in the year, the mild winter and slower start to summer reduced overall demand for both coal and natural gas in the United States. During the first half of 2023.
Natural gas prices declined sequentially and remains significantly below the year ago quarter.
Lower natural gas prices affected coal burns due to more competitive gas fired dispatch options for our customers, particularly during spring shoulder demand season.
Since the end of the 2023 quarter, we've seen a turn in weather patterns with historically high temperatures blanketing much of the U S and portions of Europe .
That summer doesn't necessarily dramatically impact coal burns in the near term as our customers units typically run baseload during summer peak demand, but it can highlight the vulnerability of the grid when demand is high and renewable sources are unable to adequately respond.
Furthermore, if hot weather persists into the fall it can change normal burn schedules and accelerate coal consumption, reducing inventories heading into winter.
Overall based upon the strength of our year to date results are contracted committed tons and a relentless focus on cost control. We remain optimistic 2023 will be another record year for ARLP.
As we updated our 2023 full year guidance ranges the mile market conditions I. Just described caused some movement in contract deliveries and shifted the mix between export and domestic markets. We now anticipate arlp's overall coal sales volumes in 2023 to be in a range of 35, 5% to 36 million.
Tons down from the previous range of 36% to 38 million tonnes.
Roy Basin volumes have been adjusted to reflect lower volumes at our Gibson and Riverview operations, while our Appalachia volume guidance reflects an extended longwall move at our <unk> mine.
Our committed tonnage for full year 2023.
Is $34 5 million tons at the end of the quarter or <unk>, 96% to 97% of our anticipated sales tons of that total $4 8 million tons are currently committed to export markets. The balance of the unsold tonnage levels is expected to be supplied in the export markets primarily from our lowest cost.
Operations, thereby still generating attractive margin sale.
Sales pricing for the year is anticipated to be slightly lower than at the time of our last update we have chosen to modestly adjust the top end of our range for average coal price realizations down by $1 to a new range of 65% to $66 per ton versus $65 to 67 per ton previously.
On the cost side solid execution from our operations team allows us to improve our outlook per segment adjusted EBITDA expense per ton by $1 to a new range of 38 to $41 per ton within Appalachia, We do anticipate higher cost in the back half of the year.
Due to the extended longwall move at <unk> in the third quarter as well as a normal longwall moves scheduled for our tunnel Ridge mine in the fourth quarter.
And our oil and gas royalty segment, we are reiterating our volume guidance ranges for the full year 2023.
And we also made a number of adjustments to our outlook and close including lower DD&A at $10 million improvement in SG&A and a slight reduction in total capital expenditures.
With that I will turn the call over to Joe for comments on the market and his outlook for ARLP Joe.
Thank you Carrie and good morning, everyone.
I wanted to begin my comments by thanking the entire alliance organization for their continued hard work and dedication.
Which allowed us to post solid results for the quarter and the first half of 2023.
Their efforts helped us deliver year over year improvements in co production.
<unk> coal prices oil and gas royalty volumes net income and EBITDA.
Our year to date results have been impressive despite coal demand, both domestically and globally being.
Being lower than we expected entering this year due to a slower economic growth.
Mild weather in our targeted markets and lower natural gas prices.
The strong first half performance was led by significantly higher coal sales price per ton, which rose by 21, 8%.
Resulting in total revenues in the 2023 period, increasing by 24% to $1 3 billion.
Compared to $1 $1 billion for the 2022 period.
The year over year improvement in realized coal prices reflects the positive impacts of our contracted order book.
Segment, adjusted EBITDA expense per ton sold for our coal operations for the first half of 2023.
Was $38.73, an increase of 15% versus the 2022 period, primarily due to inflationary pressures throughout the year.
Our net income and EBITDA rose sharply in the 2023 period.
Increasing 79% and 29, 6% respectively over the 2022 period.
These increases reflect higher sales volumes in both coal and oil and gas royalties as.
As well as higher price realizations in coal, which more than offset lower realized prices in oil and gas royalties along with the inflationary pressures that carry previously described.
As Gary also mentioned, we have adjusted our production targets lower for this year.
In response to lower domestic demand driven by lower natural gas prices.
We are now operating for production units at our Gibson South mine down one unit from the original guidance in January 2023.
At River view, we have moved some units from production mode to construction mode.
To accelerate the timing of the previously announced expansion project at River view.
In June we had a groundbreaking event for the New Henderson County mine site.
The new shaft will connect through underground conveyors to eventually be conveyed to the Riverview prep plant and barge terminal.
This project is now scheduled to be completed at the end of 2024.
Committed and priced sales tons currently represent 96% to 97% of our updated guidance range and we plan to sell any remaining and contracted tonnage primarily and two international markets.
While our view of export sales volume opportunities has not changed pricing has been more volatile than previously expected.
Accordingly, we have adjusted the top end of our coal sales price per ton sold range there.
Downward from the recent market analysis.
On a positive side, we are also lowering our cost estimates by the same amount per ton sold for the year as our team continues to find ways to reduce expenses and separately volatile inflationary environment.
During the 2023 quarter, we agreed to sell an additional $8 6 million tonnes with multiple customers for coal to be delivered over the 2024 to 2026 time period.
As we can see in our updated sales guidance.
We committed meaningful tonnage in 2024.
We expect contracting activity to continue in the coming months as of the end of the second quarter.
We are committed to sell $25 5 million tons domestically in 2024.
One 4 million tons to international markets, representing an increase of three 5 million tonnes from our last update.
We also committed and priced a total of $5 1 million tons for delivery in 2025 and 2026.
Our contracting customers continue to value the certainty of supply we provide across all market conditions.
The modest guidance revisions this quarter have not changed our view that we still are on track to achieve record financial results. This year.
As we look beyond 2023, we are encouraged by growth opportunities being pursued.
Our new ventures group the recent increase in the board oil and gas price curves in acquisition prospects for our oil and gas royalty segment.
We are also seeing stability for coal demand over the next several years.
Many of our customers are projecting significant growth in electricity demand as record numbers of new manufacturing facilities are being announced to come online over the next several years.
All of these announced projects require exceptionally large electrical loads, adding to the reliability concerns of the stakeholders responsible for meeting the rising energy needs of their customers.
The increased electricity demand.
Should lead to slowing.
The premature closing a coal fired power plants in the eastern United States.
We also expect the growth in LNG terminals coming online over the next five years will support higher domestic natural gas prices further supporting stable demand expectations for our coal segment over the next five to 10 years.
In closing I am pleased with Arlp's solid first half results and encouraged by the opportunities in front of us.
We continue to add to our heavily contracted coal book at attractive levels and a robust cash flow generation positions us to continue improving our balance sheet and pursue attractive investments to meet the evolving energy needs of tomorrow.
Looking forward, we believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unit holders and 2023 and beyond.
That concludes our prepared comments and I will now ask the operator to open the call for questions.
Thank you Steve I would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star teams one moment, while we poll for questions.
Our first question is from Nathan Martin with Benchmark Company. Please proceed.
Hey, good morning, Joe Kary, Thanks for taking my questions.
Good morning.
First great job on the cost side.
However, similar to the first quarter, two shipments a little bit lower than I expected, especially based on production. So.
Maybe a bit of a multi pronged question to start first anything behind that.
Additional halfway in tons of inventory built.
You guys did mentioned reduced export sales second do you feel confident shipments will pick up in the second half over the first half.
You know what can you expect that sales cadence to look like in <unk> and then finally.
Are there any risk to further sales guidance cost hubs based on your conversations with utilities at this point. Thanks.
Oh.
To try to help try to remember all your questions. So.
Let me go ahead and give you a stream of answers here and then I'll follow up to see if I make sure that I covered everything you asked.
But specifically to the first half our production was running at a higher clip through the second quarter and as a result, that's the primary reason for our increase to 500000 ton inventory level. So our actual contract book.
Has been run consisting has been running consistent with what our ratable requirements are under the contract. So if we look at our contracts.
And look at our average ratable right, we're right at 99% of what we should be under the contract switches.
Really good.
Because theres always.
Certain issues that people have to deal with so we feel very good about our customers' adhering to the contract terms in the first half and as we look to the second half we.
We expect the same I think that there are a few customers.
Are constantly asking us for deferrals. However, I believe all of our customers. Appreciate what we did for them in 2022 and they understand that they should do the same thing for us this year.
As we think through.
The biggest issue I guess on timing it gets into the export market.
We have a couple of customers that are definitely committed to take the volume the timing is somewhat.
Lumpy.
And that does impact some of the volumes in the first half as well not that much but by a little.
As we look to the end of the year, we are anticipating with our guidance about <unk> 5 million tons of inventory.
I would not expect that to grow beyond what would be normal when we entered when we entered into this year, we had about a <unk> 5 million tons carryover.
Most of that was just tied to timing vessel shipments and other methods. So I think as we look at this year.
Trying to factor in what we think the demand for export as well what we think.
<unk>.
The contract takes under our contracts would be.
We believe we are on track to our current guidance.
The way I would measure any variability to that and we wouldn't we don't expect it to be greater than what our 500000 time was last year.
I mean, that's always possible for things to change, but theres a lot of encouraging signs.
As we look at the last 12 months one for comparison when you compare 2022 against 2023 about this time last year, we saw customer starting delay and defer.
Coal tonnage. So when you start looking at comparisons in 'twenty three versus 22, youre not going to see the significant difference is what we saw in the first half on coal shipments in our view.
We've seen this hot spell in July .
And that doesn't seem like it is going to abate anytime soon so we think thats going to be positive for coal Burns.
The natural gas forward curve is still approach and $3 50 at the end of the year, which is constructive and going into the winter.
Depending on exactly how long.
This heat wave.
It goes and really what happens in the economy.
We believe that.
We're well positioned.
Running into 2024 so.
Overall, I'm very pleased with our customers and their willingness to continue to take under the terms of our contract.
I'm not optimistic that the guidance, we've given that there should not be any further adjustments.
Demand, we will be as we said in our prepared comments.
Slowing down production, so Gary I don't know if you want to comment specifically on the cadence.
Third quarter and fourth quarter on sales that were projected yes, I think I think.
Yes.
Just take a look at.
What our expectation is in the third and fourth quarter, it's pretty ratable between the two quarters. When you look at the anticipated volumes that we would anticipate the ship and each one of the quarters.
So when you take a look at what we did in the first half and back into our overall guidance I would I would anticipate shipments to be pretty equal in the third and fourth quarter.
The year, it's not really that unusual to what we experienced last year at this time as well we were in a similar situation in <unk>.
And that was a result last year and Thats.
Our expectation for this year as well.
Clearly it really appreciate the color there guys and then maybe looking ahead good job securing additional tonnage you called out for 24 to 26.
As we look at 'twenty four and beyond.
Do you feel like this 36 million ton run rate for 'twenty three is still achievable over the next few years.
With some puts and takes but it'd be great to get your thoughts on there may be potential EPA regulations floating around so you just talked about some of the demand that's coming online in the industrial side. How do you think those things affect your production and maybe even the U S. Coal production overall as we look ahead.
So answering your first question, yes, we do believe that $36 million run rate is sustainable.
Over the next several years.
When we look at the negotiations are yet to be determined.
In the back half.
We've got probably over a half dozen customers that we believe will be in the market.
To build out their book for.
24, plus.
Most of our solicitations had been for three year period.
And most of them are similar.
Similar tonnage so.
We believe that with our customer base and their plans for the future.
Do see.
The ability to maintain our $36 million at a minimum.
It could go higher depending on what we wanted to do in the export market. So.
Targeting about $6 5 million tonnes.
This year and to the export market.
It's possible that that number would go down if we are successful on some solicitations in the back half with the ability to flex back up to something over $36 million, depending on the export market.
Next year and the following year so.
Specifically to the EPA rules.
They are out there in force trying to.
Accelerate this transition.
We believe that essentially everything they're doing is in violation.
The major questions doctrine that was the result of the.
West Virginia versus EPA decision last year by the Supreme Court.
So theres a lot of legal activity going on to try to.
Prevent those rules from coming into effect.
I think that with the demand.
Projections.
For electricity.
There are several utilities that are engaged in.
Well as.
Bert.
The different <unk> trying to give warning signs to the administration.
We need to maintain all of our fossil fuel fleet, that's both coal and natural gas.
There is still pressure for some that believe that you can continue to close plants.
Still grow electricity.
Quite understand that as far as generation.
To meet the growing demand.
So we're we.
We feel good about the future and we feel good about the demand.
Last week.
Elon Musk spoke at a Pacific gas and electric summit.
And he basically was saying that.
His biggest concern is theres insufficient urgency and people just don't understand how much electricity demand there will be.
He is basically the headlines we're tripling of electrical output.
We.
Believe the same thing that he is saying I don't know that the math, but we definitely are seeing.
And everything we're looking at that the demand predictions for electricity.
Our.
Pretty low.
Our investor owned utilities.
Compared to what we are hearing of opportunities to make investments and this transition area, that's going to require quite a bit of electric load and so and you still see the delay in getting.
Replacements for coal plants. So we think it's going to be delayed.
Practically speaking and hopefully by policy, but.
President Biden continues to double down on us.
Beliefs.
Sure.
But I think in talking to the industry.
Some caution that's being raised.
And we're getting input from customers just saying there.
And we need you to continue to to maintain your production level.
For the next decade is what we're hearing now.
We will have to wait and see where the politics rules over what the engineering.
Officers are saying or engineering management, saying.
But we feel good about our demand staying at current at this.
36 million tons, and hopefully we can grow it a little bit.
Very helpful. Thanks, and then maybe just finally, if I could ask one last question you guys mentioned you know your cash position or liquidity is affording us the ability to look at multiple investments can you talk about some of those opportunities you guys are seeing in the marketplace. Currently maybe on the other oil and gas side and the new venture side.
And timing of our size would be great as well.
So on the oil and gas side.
We committed her thing is still continuing to be the same as what we've indicated before and that is we're reinvesting prior.
Prior year's EBITDA into the oil and gas space.
So through the second quarter.
Invested.
Around $76 million.
<unk>.
And with our guidance that leaves probably $35 million or so where we had $35 million.
For the ground game is what we call it.
As opposed to competing in packages.
And we've completed.
Ground.
$4 million of that.
Yeah.
In the first half.
And just in July we closed $5 million.
Investments.
And as we look to the balance of the year. So there's another $25 million or so yes, we would.
We think there are opportunities out there. So I would expect that we will be able to complete.
Those investments.
And our oil and gas.
Segment.
Our royalty segment.
We continue to be positive.
On that segment for.
And for the long term.
We continue to.
See oil demand in the world.
<unk> levels.
We really just don't see that changing even with.
The conversion to electric vehicles.
Think that electric vehicles will grow we're not.
And the belief that it's going to grow as fast as unbelief, but.
With the refining the world demand for oil we believe that we will continue to see.
Great opportunities to invest that cash flow and get returns comparable to what we've been getting which we find them to be attractive.
With natural gas with LNG terminals coming on we think the demand is going to be growing.
There is.
As well, which benefits not only on.
Royalty segment, but also.
Should impact domestic pricing.
Which will benefit our coal operations.
On the new venture side matrix is continuing to perform as we previously expected.
We are also looking at several opportunities to invest.
In.
On the new ventures area, our primary focus.
Our focus right now are on energy solutions issues, which basically get into <unk>.
Batteries.
Storage and other aspects of the battery Belk and opportunities that are presenting itself.
With the continued investments.
From Michigan down through Indiana, Kentucky, Ohio, Tennessee, et cetera, which is right in our service territory.
Have nothing to talk to you about today.
Hopefully by the next earnings call, we'll be able to give you better color.
On the opportunities that we're talking about there.
Great really appreciate it.
Joe I'll leave it there guys best of luck in the second half.
Thank you.
Yeah.
Our next question is from Mark Reichman with Noble capital markets. Please proceed.
Good morning, and thank you for taking my question.
Uh huh.
I'm sorry can you hear me.
Yes, yes, we can hear thank you, okay I had to dial in on my iPhone, because we were having problems with the server on the other phone so.
My question I have is you know looking at sales I mean, it looks to me like even at the low end of your guidance Youre still going to have modestly higher sales in the second half for me I think the wildcard is really the price you know.
Illinois Basin pricing has been relatively steady.
But the pricing in Appalachia.
Considerably second quarter versus the first quarter, but your guidance suggests on a total basis, but really your only shaved off a dollar at the top end. So could you just maybe illuminate are your expectations on pricing.
Clean the basins for the remainder of the year.
Yeah. So.
We are totally focused on the international markets. So theres really no spot market, we don't anticipate there'll be any activity for 2023.
And.
If you look at the one thermal.
We have basically.
In East Kentucky is.
This is really a premier product and it doesn't really trade off those indexes.
We don't have that much to sell.
Open to the market this year there anyway so.
Our reduction down really reflects the decrease in API too and the export pricing.
The export market that we are planning to fill.
For the balance of the sales.
When youre looking at the pricing.
That's on a delivered basis, so theres a lot of different moving parts back to transportation and logistics.
Can <unk>.
And some of that.
As far as getting a good netback back at the mine.
So we estimated when we got several conversations going on with our trading partners for those export volumes.
And we believe we conservatively priced.
What we think those sales opportunities are going to be in the back half of this year.
And we're confident that we can place those tons. So we feel really good about our guidance.
Okay.
As long as we can continue to.
Execute and demand stays.
Consistent with where it is now and there is.
It's hard to see what catalysts would change that.
Based on conversations we have there's always surprises, but right now we feel very good about our guidance.
And then I guess I guess, what I'm kind of getting at is it kind of implies.
An improvement in the third and the fourth quarter and Appalachia pricing relative to the second quarter, but maybe not as high as the first quarter I mean, but you would expect maybe a rebound in pricing in Appalachia, assuming a Illinois basin remains relatively constant I think right now I have Illinois based a little weaker second half.
But just as the model stands now I think I'm around 65 in the quarter on a full year basis, but.
Like I said that doesn't imply the third and the fourth quarter, our coal sales price per ton in Appalachia.
A bit higher than the second quarter or is that kind of consistent with what you're thinking.
Yes, Mark I don't know, what you mean by buy quite a bit higher but I think as we look at the second half in Appalachia.
We do anticipate it being slightly higher than where we were in the <unk>.
In the second quarter.
Generally speaking on the Appalachia side.
As we look at the back half of the year anywhere from 2% to 4% higher than where we were.
In the second quarter.
Yes.
Kind of as we look at the pricing piece of it related to that particular area, where our guidance kind of zero in on.
Okay. No. That's fair and then those are contracts, yes to mark So I mean, it's not like we're looking at the market and projecting on the domestic side.
Because we're looking right.
Contract booking.
Yeah.
As expected to be delivered.
Yes, its pretty firm its pretty firm at this point you've got good visibility there and then the second question was just on that G&A I mean.
$10 million reduction I mean, that's almost 10% of a.
Full year previous guidance.
You know I guess, you do guidance would kind of track with the first and the second quarter expenditures, but.
Were there any expenditures that you just that you were expecting that you decided not to spend or or what do you attribute to the to your lowering your G&A expense guidance.
And I think really when you get into G&A, It's just looking at what full year results.
And the impact that has in terms of the full year results are anticipated and what that impact.
It works back to on the G&A side.
So kind of you adjust to that based on kind of your first half spending and that like I said that kind of tracks with the with the new full year guidance.
And so that drag of around $80 million, but okay, well that was 10 million was pretty significant.
Relative to the to the to the previous guidance and then just lastly.
This kind of goes to Nathan's question earlier, which I thought was a good one.
You have very strong free cash flow, you know roughly what about $140 million or a $39 million very strong coverage on the dividend.
So just basically kind of how are you kind of thinking about capital allocation I know you took down some debt recently.
So just kind of your your overall view on do you think you'll get more active on the acquisition front or just how are you kind of thinking about you know managing.
The cash flow that you're generating.
Yes, so I think as we.
We've indicated previously we plan to.
Sustain our distribution at the 72nd quarter.
Secondly, we will.
Provide the capital necessary to maintain our cooperations plus the growth.
Projects that we previously announced so capex will.
B, what is guided and maybe a little lower.
But right within those ranges maybe at the low end I can't precisely tell it's all timing.
Commitments are.
Pretty much there.
Oil and gas, we've talked to and so the balance Dan gets to that.
Pay downs, which Gary mentioned it is fully.
In his prepared remarks.
That we will look to continue to.
Pay off those senior notes.
And then we've got.
These investment opportunities primarily in the new venture space.
Net.
We're looking at and if you go back to.
A year ago.
I talked in terms of two different ways, we could look at investments.
One was to how we would think about just good investments it will give us visibility.
And to various areas that we could do.
Term on how to make investments in those assets it could actually be long term cash flow.
Vehicles.
And that fifth vertical was in those type of asset investments.
I think we sort of matured based off of the two years.
With an investment philosophy, I think we've zeroed in.
With the experience we've had to focus on some businesses that we yes, we still may invest in a minority position in some <unk>.
Growth businesses, but when we do that it's definitely going to be.
In conjunction with the opportunity to invest more alongside those particular businesses or those types of industries, where we can in fact start building businesses with a long term.
And.
We are again focused in the battery area, we just think that.
With the increased demand in electricity.
That battery storage.
Low four.
The electrical sector.
As well as the industrial sector.
There's going to be an area of <unk>.
Huge demand so.
We're focused on that area and seeing how we can participate in that.
And.
Investment sizes, we typically made are anywhere from $25 million to $50 million.
Per investment to make a sizable enough.
Yeah.
We see opportunity to make a good return.
Have those strategic relationships.
But not so much debt.
That we're ending up focusing on one or two investments, but we will have the opportunity to have.
Several.
So that.
We've got opportunities too.
Be able to grow our company over the next five to 10 years.
As I mentioned in my prepared comments, we are encouraged by what we're seeing.
I think and hope hopefully by the next earnings call, we'll be able to give you more specifics on.
Uh huh.
Specific investments.
Hopefully we'll be successful in.
Making some commitments by that timeframe, but we're not in position to talk about those right now.
Well, that's very helpful. I really do appreciate it. Thank you so much.
The other thing I would just say that we're looking we're hoping to find some opportunities to invest in business as it will allow us to bring on more debt capacity as well. So these would be cash flow generating type businesses. So that.
That it would allow for additional debt capacity additions.
Looking into 2024.
Well, thank you very much.
Okay.
Our next question is from David storms with.
<unk> capital markets. Please proceed.
Good morning.
Hello, Good evening.
Just wanted to start you mentioned in your prepared remarks on some cost savings measures that you've started.
Just wondering if you could give us a little more color on what that looks like.
Everything goes back to efficiency.
That's the main.
<unk> trying to determine.
We're the most efficient.
Mine plan is obviously everything needs to try to stay.
Staff ourselves to be able to operate at full capacity for what we've got invested back cutting back some of that production.
We have to decide how we do allocate that.
But our guys are focused on that I think supply chain.
He is an area there.
That last year.
We were.
Meeting to buy more supply than we actually needed just to ensure that we had in materials and supplies I think that has allowed us to.
With the years.
Yeah Okay.
Over the last year the supply chain has improved.
So thats allowed for some small.
Reduction in expenses, but it really just gets back to productivity in large part what we're saying.
In the second quarter was just the productivity at tunnel ridge by not having the longwall moves.
So.
Productivity is the key to the.
Cost in most cases and that's nice.
Definitely true for us.
Very helpful and can you just kind of touched on it.
With staffing at full capacity it sounds like you're reallocating some of your shifts is there any.
Threat of losing labor, especially in this tight labor market as you move people around.
We have had a little transit or little bit of some.
Some people that had left but.
Uh huh.
We're trying to maintain our head count and so far we've been able to do that and.
Again, that's why we're repositioning.
To some areas it may not be as productive in the short term, but will allow us to be more productive.
Once we get through a couple of these construction projects, we got the one at River view.
And the extended longwall move at <unk>. Another example.
Where we're moving into a new area.
The newest the new area that we're moving into have longer panels.
So our development.
It has been.
Yes.
Needing to catch up with the length of the panels that we're moving to.
And.
We could've design that differently, but given where the market is we felt like this was a great opportunity just to go ahead go for the longer panels.
So that will reduce our production in the short term.
But positioning ourselves for next year.
Should give us the lowest lower cost.
The future there than what we would otherwise have with a shorter panels, so but from a head count basis, we're maintaining our head count, but it is targeted more to the 36 million ton production level compared.
When we started the year, we were targeting 38.
One quarter, we went to 37 net were 36.
Yeah.
Labor is still tight but.
We're able to maintain at this level.
And the attrition has slowed down.
Yeah.
Over the last three months or so.
To where we can we feel like we can maintain this level.
That's great color. Thank you one one more if I could just any comments you have around the new customer acquisition environment, given that coal prices are starting to stabilize a little bit of inflation started to moderate.
Is any of that helping you.
Driving new customer acquisitions.
I wouldn't say new customer acquisitions, I mean, we've been in this business quite a while so we.
Sales to most of those are going to be around for the next 15 years, which is what we targeted we.
Has.
<unk> had some conversations where we're hopeful that we could pick up some market share.
But.
Yeah.
We'll have more to know as we go through these solicitations, whether that happens or not but.
As I mentioned earlier, we're very confident that we will be able to maintain at this level.
Not grow our domestic book beyond the 36.
Beyond $30 million.
And it allows us to stay at the $36 million.
And in that.
Then we'll have to decide.
Whether we want to pull back the international side or more try to grow production a little bit.
But right now I'd say domestically, we're targeted on the $30 million a year.
Run rate for the next five years or so.
And hope we can sustain that and believe we can.
Understood. Thank you very much.
Our next question is from David Marsh with singular research. Please proceed.
Hi, good morning, Thanks for taking the question.
Just wanted to touch on the.
The notes real quickly.
Are they continuously callable at this point and what are your what are the parameters around calling those 30 days notice.
Yes to answer your question on that.
David Yes. They are they are callable at par anytime.
And like you said, it's just a 30 day.
Generally a 30 day notice period that that we are required to provide in order to call those.
And so obviously interest expense was down a good bit in the quarter I suspect in part.
The partial call should we should we expect that to continue to decline as.
As you continue to work those off and can you kind of put some maybe put some brackets around that in terms of how quickly that continues to come down.
I think as.
As it relates to the senior notes.
Current expectation will continue to call those as I mentioned in my prepared remarks on a on a consistent basis. The current stock price process right now is to do something similar to what we have been doing.
Here in the most recent quarter.
That's obviously up for conversation each ton that we make that decision to call, but I think.
A consistent quarterly.
Call would be a good assumption to make.
Okay, Yeah, that's really helpful.
Prudent use of cash flow right.
I think in this environment, its awfully tough to consider refinancing themselves.
Just shifting gears a little bit.
One thing I noticed is that.
On the yeah.
On the oil and gas side.
Yes.
He sold has really grown really nicely very nicely year over year I mean, it's up.
15% year over year. So clearly these investments that you guys have been making are paying dividends and.
Obviously oil is starting to come.
Climbed back up a little bit.
Ladies here and there.
That mix for you guys is a little bit gassy, but.
Could you just talk about you know.
Directionally.
How does that change at all.
How does that change the game for you guys.
In terms of evaluating acquisition opportunities as well.
Just as oil continues to creep back up and you know what do we need to see it on the Nat gas side for you guys to get.
Kind of better price realizations may be closer to the back half of last year type levels.
I think on that.
Right now the guidance we've given.
In this release did.
Did not factor in the most recent uptick in oil prices.
I think that as we look at acquisitions, we continue to be focused.
In the Permian.
And.
As we think.
Think about.
The Delaware.
Is a little bit more gassy, but yeah I think.
Most of our acquisitions, most recently have been more oil base, we still have our.
Mid composition, but.
We're still bullish on gas too.
But I think our focus on the royalty side will continue to be consistent with what we've been doing and really target the Permian, primarily but we will look at all basins.
And all opportunities.
Thank you.
We have not changed our underwriting standards.
And we are seeing some good deal flow so.
Both for small and direct investments and Theres still some packages out there that will continue to evaluate.
Got it. Thank you guys very much full color I appreciate it.
So while yield to the next call.
<unk>.
Our next question is from Arthur Katherine T knows with ANC capital. Please proceed hey, guys. Good morning. Thanks for taking my question just a couple of things on the financing a financing question Kerry are there any minimum byte sizes when you guys.
Paul the senior notes.
No Theyre expect us yet.
No. There is no minimum byte sizes is really really up to us whenever we called in to designate what amount that that we are calling they are callable on a pro rata basis, so whatever amount we designate.
It's pro rata basis back out to the holders of those notes.
But if we wanted to do $10 million, we could we could do that.
We just opted to do $50 million in this last quarter.
And it probably depends on how you're feeling where the cash is going to be at the end of the months of the quarter or whatever right. How you decide does it seems like you're matching it with your cash flows like the way I look at it I mean with that Thats right, Yes, that's correct and future opportunities for cash flows.
Got it Alright, and then just the second thing away from a finance question is I guess the Musk thing. This morning on the <unk> conference in.
<unk> was just talking about the electric demand.
A few weeks ago like the auto sales were like three point I'm, sorry, 7% like we're electric cars.
And I'm starting to think like at what point do we get.
With the electric cars in this country, where we can almost point of this is how much btu how much coal demand.
Is feeding the fleet I mean, it seems it's kind of early but it's but I was shocked at that 7% number for new car sales any any color on that you could shed where we go because it's almost displacement right, we're displacing unleaded gasoline.
With coal to power transportation, but it's early days, but any color on that would be great. Yes, so with the space I mean, the big issue that most.
That is.
As like two or three different factors. One is just the cost of the EV and what we have seen is most of the Oems have reduced their pricing.
$10000 per vehicle or so to try to stimulate the demand and really trying to get market share because youre starting to see many more models come out.
The second factor gets into.
The.
Okay, well they call a range anxiety and so theres been a couple of announcements that have come out since our last call one is with Tesla.
They're going to open their network and have partnered with GM and Ford I believe.
And that is going to rollout over.
Over the next two years, so that's not immediate but it's going to rollout over 'twenty four 'twenty five in.
Fully operational I think about 'twenty six.
And then you've seen another announcement by numerous of the.
Other <unk>.
<unk> from <unk>.
From the European manufacturers, primarily coming together and talking about building out their own network.
On top of the $5 billion Navy program that the government has put in place and we're starting to see finally, the states starting to go out and bid for those projects.
So I would say over the next year and a half to two years youre going to see a pretty robust.
Network charging stations on the highways that should give customers.
Ah stay feeling on the ability to have range anxiety.
Eliminated to where it would support.
The purchases of more evs.
I think the commitment not only by the Oems, but all of these governors around the battery to build these out.
Third factor I didn't mention is back to the <unk>.
Tax credit $7500 tax credit per vehicle.
Which also then requires a certain percentage of the.
No.
Auto to be manufactured in America, <unk>, the battery materials being sourced or Matt manufacturer.
Or some type of Assembly in America and that's.
An area that is constantly being discussed I think that.
This administration has.
When they are adopted regulations expand that opportunity to make sure. The 7500 dollar credits are available.
And so.
The price point seems to be competitive with the combustion engine.
Uh huh.
How fast that goes is anybody's guess.
But I think.
When we look at our new ventures area and we look at investments in the battery space.
All of these manufacturing facilities are talking about at least 50 megawatts.
Sometimes 250 megawatts somewhere in between for every manufacturing facility that you hear announced.
And that's a significant low compared to historic.
When business economic development officers are out looking for projects to move to states in.
In the past.
5000 megawatts would be high much less 50 to 100 to 200, so we're looking at major sinks and not only.
Are they large loads, but they want to be continuous that you do not want to have interruptible rates and we're starting to see.
Capacity concerns and Thats why are you here for Rick and all of these guys, saying, we better pay attention.
The speed of this transition because you can't continue.
To close plants and build plants add no new capacity.
So I think that demand for electricity has definitely gone up I think as I said earlier.
It seems to be.
Underappreciated.
What that speed is going to be.
And back to your question of when can we actually see that see that roll through.
I think it will be within the next two years.
In my conversations when I go out and speak to people.
I've been saying to everybody just think about how many people have a graduation and their family this year.
Whether it's college or high school or kindergarten or whatever.
And just say.
How fast did that for years go by.
It goes by in a flash.
So we as public policymakers and investors we have to recognize we're making decisions right now that are going to determine the answer to your question.
And so we don't have time, just a delay and just think business as usual we have to really gear up in anticipation of this significant growth in electricity demand.
And therefore.
It's time to for policymakers to come to the table and realize that if we're going to have reliable low cost energy.
We can't do business as usual, we have to factor and this demand growth.
And that's why I have confidence that they're going to.
Start thinking in terms of deferring some of these closures because if we're going to meet that demand you have to have electricity its bottom line.
Biden wants to Electrify America, he's got to have electricity to do it.
And we all know renewables are just there you cannot look at our renewable installation that's.
And that's adding capacity because.
We still don't have battery storage to the level that it's dependable. So you really haven't look at base load plants.
And those are fossil plants in your nuclear fleet. So.
And it's hard to answer your question precisely, but directionally I would say within two years, you will have a better idea of the <unk>.
<unk> what that demand load is.
Four focused on the eastern United States.
So for the areas, where we market I think we will have a very good idea about 2025.
Exactly what that demand load needs to be in and therefore, what capacity we have to have.
To provide reliable energy is interesting a couple of weeks ago, Barron's, who had a cover story and Siemens to big German equivalent GE, having enormous problems optimizing wind win windpower windmills and he's a great engineers. So the wind may fall far short of what's like what's the boiler plate on a windmill.
To deliver electrons so just it seems like it's happening in slow motion.
When we find out so alright, and then on the Permian.
There is a large royalty company public one I don't know if theyre, having a proxy fight whatever right. So I don't know if they are getting delayed and buying stuff on there.
Okay.
Are there more opportunities than normal for these oil and gas.
Our royalties.
In the Permian because of this it seems like there's some dysfunction in some of the M&A going on.
I would not say there is any more than normal okay.
So going.
Starting last year.
As you saw some of the price decline.
Got sticky nobody was wanting to sell at those prices, but then after.
You start adjusting to what might be the new normal.
So there is a if theres adequate deal flow for us to maintain our policy to think in terms of investing $100 million a year. That's the way I would look at it from our lands in our perspective.
Without.
Modifying our underwriting standards. So it is one of the earlier caller said I mean, our returns have been very good we've been able to hit our targets.
As we think about the investments we've made.
And I think our guys have done a very good job.
Trying to assess.
The pace of drilling.
And.
You can read a lot of stuff, but I think in the Permian theyre going to continue producing at the same level for several years to come.
So as a royalty owner.
We feel good.
It's a great investment for us to be complementary.
For our cash flow purposes, as we look to where we want to be in 2030.
And you have the right size and Exxon and where you are right.
Too big where it doesn't make a difference here and youre not too small.
You got a good sized right I mean, Kevin Donlon, Yes, Youre right.
We think so yes, yes.
Okay, great. Thank you very much for taking my questions. Thank you. Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Cary for closing comments. Thank.
Thank you operator and to everyone on the call. We appreciate your time this morning as well and.
And also your continued support and interest in alliance our next call to discuss our third quarter 2023 financial and operating results is currently expected to current late October and we hope everyone will join us again at that time.
This concludes our call for the day. Thank you.
Thank you you may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.
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Sure.
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<unk>.
Yes.
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Okay.
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