Asset Class: US Stock (Sector: Energy / Industry: Oil, Gas & Consumable Fuels)
Original Investment Thesis (11/2017): Cyclical investing!!! This investment has a lot of strangeness that I needed to figure out in order to get comfortable owning it (besides being a coal company). It was the first coal MLP formed in 1999 (originally started in 1971) and is the 2nd largest coal producer in the country. Figuring out if I wanted to own an MLP and how best to own it was an initial issue. Then figuring out if this company made sense was next. In the grand scheme of things, this is a smallish company in an industry that is on the decline (and the target of plenty of haters…legislative and competitors). This is why it is showing up for me to buy however with a lot of value for the investment to be had. I like that there is a lot of insider ownership in the company and that they talk with ‘long-term’ language. I’m not crazy about the coal industry aspect but I also don’t think we are going to stop burning coal on planet earth anytime soon (and these guys have 49 years of production left in the ground).
Current Thoughts (9/26/2019): Long term holding. They manage their debt well and have been deleveraging for the past decade (and especially since the last industry downturn in 2016). They are starting to diversify into oil and gas mineral rights. The MLP corporate structure cuts out the Federal tax at the corporate level and requires them to pay out cash to limited partners. The yield is currently 13+% and this is not as tax-friendly for me personally as I normally like. Regardless, I think the arrangement has more pros than cons. The high yield also basically pays for the initial investment in around 5-6 years (although I reinvest the payouts).
ARLP (Alliance Resource Partners LP) – Annual Reassessment
I’ve owned this stock for a little over a year and just completed my annual reassessment on it (using tools I’ve updated significantly since I purchased this stock). I’ve attached a PDF that has my analysis in case anyone else might find it useful:
I purchased this stock back in November 2017 at $18.35. These are my thoughts after reviewing this when I completed my initial purchase in 2017:
- PRO #1 – First coal-based MLP (formed in 1999). 2nd largest coal producer in the country. 8 b tons in reserves 37 m tons sold in 2016 (49 years available).
- PRO #2 – I love the annual reports talk about ‘long haul’.
- PRO #3 – Workforce is union-free.
- PRO #4 – Low debt and much lower debt to equity over a 10-year period (lowest in most recent quarter). They spent downturn of 2016 bolstering the balance sheet (including lowering payouts).
- PRO #5 – MLP eliminates double taxation.
- CON #1 – Coal is out of fashion…but there is no way we don’t wind up figuring out how to burn this stuff without polluting. FACT!
- CON #2 – Only 4 analysts follow them.
- CON #3 – I’m not actually excited about owning an MLP…I guess. This is an MLP (no corporate income tax). I researched owning these in my ROTH. It will seemingly trigger the UBTI/UBIT tax rules (which I do not want to get into). I need to own this in my taxable account (if at all). Income (distributions/dividends) will be treated as income for me upon tax time.
- CON #4 – Tax reform in Senate right now might impact the creation of new MLPs (not impact existing ones).
So, one of the biggest things that look different for this business is the large increase in shares outstanding. What the heck happened?!?! Was I diluted? This is a restructuring in the corporate structure. The 2017 annual report says: “The Alliance Partnerships also took the first step toward simplifying our structure through an Exchange Transaction. The Exchange Transaction eliminated AHGP’s incentive distribution rights and converted its general partner interest in exchange for the issuance of 56,100,000 ARLP common units. Completed in July, it further enhanced our capital markets capacity and access. We are also moving forward to complete the process of fully simplifying the Alliance Partnership structure, which will result in ARLP being the only publicly traded reporting entity”. So this is related to the sister company AHGP – Alliance Holdings GP, L.P. They are merging these two entities into ARLP. This should not be dilutive overall. Honestly, I don’t claim to understand why they had the two entities to begin with and how the merging really impacts my position in ARLP overall. My take is it is not a big deal but I could be completely wrong on this.
These guys think like owners…long term owners…because they are. Insiders have 21% ownership and insiders are still buying (with Directors buying in $19.55-$19.85 late last year). When I read the annual reports and see the language they use and match that up with their ownership I know these guys are going to run the company to their benefit. I really like this aspect of this business…A LOT!
My one major sticking point with this entire investment is just the fact that it is coal production. Coal is a dirty fuel, a declining industry, and a huge target for all the upcoming green energy investment. It could also be on the wrong side of legislation/legislatures who want to make people using coal pay extra for using it (which could have an impact on pricing and demand). I don’t view either of these risks as being outside the realm of possibility as the whims of governments can change based on who is in elected power. Currently, there is not too much bad on this front worldwide (other than generally the world is moving away from coal usage) but this could change and impact the company greatly. All that said, I don’t think we stop using coal anytime soon (maybe ever) and there will be a need for the country’s second-largest coal producer to continue to produce (and to use up their 49 years of available supply).
In general, I like this company and will likely add to my position in it a bit at this time based on this updated analysis. I don’t really find too much wrong with this investment and the things I look at show a high degree of certainty. I’ve been reinvesting the dividends since I purchased this. With the really high yield associated with this that has not been insignificant. I think going forward I will up my investment to be in line with my target allocation and then no longer reinvest the dividends and just let those flow into my account. At the current rate, the investment will pay for itself in a few years (and hopefully I’ll then have the original investment plus some extra capital to invest elsewhere). I might also just keep reinvesting too since I think the value is right and I like the company. Hmmm! Not sure yet!
I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72