More solid years ahead for ARLP

An income investment with some potential for higher unit prices as US coal plants stay online longer than expected

We’ve mentioned ARLP in a number of posts on TCT, and there’s been plenty of comments about the stock in the chat. We’re past due to put out a fresh analysis, so here goes. Note that there’s a good background piece on thecoaltrader.com if you want to dive deep into the technical/coal operations background on the company.

Alliance Resource Partners LP (ARLP) is an Illinois Basin (ILB) and Appalachian (APP) thermal coal producer with a long, successful track record and is run by founder Joe Craft, whose family owns ~29% of outstanding shares (including his ex-wife’s shares). The company in its current form was born in 1999 when it IPO’ed as a Master Limited Partnership (MLP), and it has had a history of consistent, substantial distributions to unit holders.

Since its IPO in 1999, ARLP has generated an annualized total return of >15% compared to the S&P 500's total return of 8%. Many a hedge fund manager would be happy with that performance, and it’s even more impressive that Craft pulled it off while virtually every other coal mining competitor went bankrupt over the last decade or so.

Source: YCharts.

Cumulative cash distributions since IPO are shown in the chart below. Solid distributions have been paid every year, with very few lean years.

Source: ARLP Investor Presentation, December 2024.

Quick note on the company structure. MLP’s generally produce steady income and unitholders receive the bulk of that income through cash distributions rather than dividends. There aren’t a lot of MLP’s operating in the coal space. The largest out there is NRP, which operates a similar business model, but with a focus on met instead of thermal coal. Matt and I will get more content out on NRP soon. There was also Penn Virginia Resource Partners LP, but that went through a series of acquisitions and is now part of Energy Transfer Partners (ET).

The MLP structure means that holders of ARLP must file the somewhat-complicated form K-1 on their individual income tax returns, but there are benefits. Cash distributions are treated as a non-taxable return of capital as long as the unitholder’s tax basis remains above zero. That’s pretty helpful and especially so if you live in a high-tax district like I do.

ARLP’s current distribution yield is running at 10.65% as of the time of writing, which is much higher than the dividend yield of MLP’s in the pipeline space like Enterprise Products Partners (EPD), Energy Transfer (ET) and MPLX (MPLX), which yield in the 6-7% range.