Here’s why Alliance Resource Partners shares fell 13.9% today

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What happened

Actions of Alliance resource partners (NASDAQ: ARLP) fell nearly 14% today after the company outlined the steps it has taken or will take to position itself in the current environment. Energy demand and prices have collapsed in response to the coronavirus pandemic and a crude oil price war between Saudi Arabia and Russia.

This has forced the partnership to make significant changes to its operations for the remainder of 2020. Alliance Resource Partners has withdrawn its financial guidance for the year 2020 and will significantly reduce coal production and overall costs. The partnership has also suspended its cash distribution.

Starting at 12:15 p.m. EDT, the small cap stocks came in at a loss of 10.3%.

Image source: Getty Images.

So what

The distribution yield on Alliance shares has exceeded 30% in recent weeks as the stock has fallen amid the broader volatility of the market. This was perhaps the strongest argument in favor of ownership of the company, so it’s no surprise that the stock tumbles upon news that distribution has been temporarily suspended.

The partnership said it will now seek to match 2020 coal production with sales commitments, which total 28 million tonnes. This is a significant reduction from the initial production forecast for the year 2020 of around 36.5 million tonnes.

Alliance Resource Partners reassured investors that nearly 75% of national sales are made in states that depend on coal-fired power plants for the majority of their electricity generation. But that may not be very reassuring.

In 2019, American coal-fired power plants produced the least amount of electricity since the late 1970s. In January 2020, a mild winter resulted in a 35% drop in the electricity production of the country’s coal fleet compared to the period the previous year, according to data compiled by the US Energy Information Administration. Natural gas, nuclear, wind and solar all gained market share during this period.

Now what

Despite the company’s reliance on coal, Alliance Resource Partners was comfortably profitable and generating healthy cash flow before the recent volatility in the energy market. This strongly suggests that the distribution will eventually be restored, although investors have no way of knowing how long the ensuing global recession will last.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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