Stonegate Capital Partners Updates Coverage on Alliance Resource Partners, L.P. (NASDAQ: ARLP)

DALLAS, TX -- November 11th, 2022 -- Alliance Resource Partners, L.P. (NASDAQ: ARLP): Stonegate Capital Partners updates coverage on Alliance Resource Partners, L.P. The full report can be accessed by clicking on the following link: https://stonegateinc.com/reports/ARLP_Q3FY22.pdf

Record 3Q22 Revenue Leads to Increased Dividend

ARLP reported solid 3Q22 results that continued the trend of strong growth. Both volume and pricing came in better than both last quarter and last year. While inflationary pressures and supply chain disruptions were present, top line performance more than offset the effect. While inflationary pressures and supply/transportation issues are expected to remain in the short-term, so are the current energy supply/demand dynamics. Given this, ARLP adjusted coal volumes and prices per ton sold estimates downward but increased midpoints for O&G royalties. Lastly, ARLP raised its quarterly dividend 250% y/y and 25% q/q to $0.50/sh.

• Strong 3Q22 results stem from record sales prices – ARLP reported revenue, adjusted EBITDA, and adjusted EPS of $628.4M, $250.2M, and $1.29, respectively. This compared to our/consensus estimates of $663.1M/$667.8M, $277.7/$282.9M and $1.51/$1.52, respectively. Upside was seen at all segments, but coal sales was the main driver of the strong year over year revenue growth. Additionally, margins were slightly lower as volumes and pricing surpassed our expectations to partially offset inflationary pressures.
• Coal opeartions continue to point positively – ARLP 3Q22 coal sales were $550.6M, up 52% y/y and 4% q/q. Volumes sold also increased 8.1% y/y to 9.2M tons. Pricing (asp/ton) was also up significantly 40.5% y/y to arrive at $59.94 compared to $42.65 in 3q21. While transportation issues continue to negatively impact operations, supply/demand dynamics remain favorable to the coal industry and ARLP. Additionally, these trends are expected to continue such that ARLP believes in should see continued margin expansion in F22 and into F23 and F24.
• Royalty business also has tailwinds – O&G royalties saw solid results with revenue growing 76% y/ to $35.3M. Volumes were up 33% y/y and prices were up 32% y/y. The royalty business is expected to continue to benefit from the favorable energy market conditions, favorable forward pricing, and increased drilling/completion activity.
• Green energy transformation adds new investment - Following two investments made in 1Q22, ARLP announced an additional $25.0M commitment to a private equity fund, NGP Energy Capital. NGP’s focuses on investments in green energy during 2Q22. Fitting nicely into its announced strategy, ARLP hopes to gain additional exposure to green energy investments, but more importantly, to leverage NGP’s expertise to learn and find additional attractive areas for investment. Recently ARLP elected to hold its commitment to Francis Energy at the initial $20M convertible note investment, reiterating their investment in the EV infrastructure market.
• Valuation - We use a comparative analysis to frame valuation. Given the volatility in coal prices, we are averaging our FY22 and FY23 adjusted EBITDA estimate to obtain a “normalized” run rate. Using an EV/EBITDA range of 3.5x to 4.5x with a midpoint of 4.0x, we arrive at a valuation range of $26.53 to $34.47 with a mid-point of $30.50.