DALLAS, TX -- August 1st, 2023 -- 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: ARLP Q2 2023 Report
ARLP Releases 2Q23 Earnings, Maintaining Momentum
ARLP reported solid 2Q23 results that continued the trend of growth set last quarter. Increased pricing over 2Q22 helped mitigate decreased volumes. While the Company saw a decrease in demand due in part to unseasonable weather, ARLP being a provider of choice helped maintain pro-rata deliveries at 99% of contracted values. Given the softening demand, ARLP updated its 2023 guidance to slightly decrease expected coal ASP and expected FY23 volumes. We have updated our model slightly; however, we note that management is still optimistic that the full year 2023 results will be the strongest in company history.
- Strong 2Q23 results – ARLP reported revenue, adj EBITDA, and adj EPU of $641.8M, $249.2M, and $1.30, respectively. This compares to our/consensus estimates of $667.8M/$675.2M, $259.8M/$254.5M, and $1.24/$1.30, respectively. Volumes were challenged in the quarter, however, increased pricing helped mitigate the slightly softer than expected demand. The net result was another quarter of y/y EBITDA growth, maintaining the momentum seen in 1Q23.
- Coal opeartions continue to point positively – ARLP 2Q23 coal sales were $560.3M, up 5.4% y/y and down 3.2% q/q. Volumes decreased slightly by 0.3% y/y to 8.9M tons, but increased q/q by 5.1%. Pricing (asp/ton) was up 5.7% y/y to arrive at $62.93 compared to $59.53 in 2Q22. While unseasonable weather was a factor last quarter, ARLP is expected to see a pricing rebound in 2H23. With 96.5% of tons contracted for 2023 and 75% for 2024 we note that strong long-term demand remains in the market.
- Royalty business is challenged – Total royalty revenues saw a decline of 8.3% y/y to $50.0M. Volumes were up 40.6% y/y for BOE sold and down 2.8% in y/y coal royalty tons sold. O&G prices were down 40.2% y/y with coal royalty ASP up 17.4% y/y. With a peer leading Adj. EBITDA margin and approximately $105M earmarked for O&G acquisitions this year, we expect continued growth in ARLP’s royalty business.
- Strong liquidity and cash flow position – The Company ended 2Q23 with a liquidity position of $717.2M, of which $284.9M is in cash. This strong liquidity position allowed ARLP to repurchase $34.2M worth of its $400M senior note outstanding that is due May 1, 2025. Management is expected to prioritize debt repurchases over the coming quarters. In July, the Company redeemed an additional $50.0M of senior notes. ARLP also generated $153.5M of free cash flow in the quarter, a significant increase from $81.3M generated in 2Q22.
- Valuation – We are using an EV/EBITDA framework to inform our ARLP valuation. Currently ARLP is trading at a FY24 EV/EBITDA of 2.5x compared to comps at an average of 3.4x. We are using our F24 expected EBITDA, and an EV/EBITDA range of 3.0x to 3.5x with a midpoint of 3.25x. This arrives at a valuation range of $23.67 to $27.92 with a mid-point of $25.80
