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Alliance Resource Partners LP (ARLP) Q1 2019 Earnings Call Transcript

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Alliance Resource Partners LP  (NASDAQ: ARLP)
Q1 2019 Earnings Call
April 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Alliance Resource Partners, L.P. First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Brian Cantrell, Senior VP and Chief Financial Officer. Please go ahead, sir.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, Chad, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2019 earnings and we'll now discuss those results as well as our outlook for the balance of the year. Following our prepared remarks, we will open the call to your questions.

Before beginning, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these comments, the Partnership has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law to do so.

Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP measures and the most directly comparable GAAP financial measure are contained at the end of ARLP's press release, which has been posted on our website and furnished to the SEC on Form 8-K.

With the required preliminaries out of the way, I'll begin with a review of our results and then turn the call over to Joe Craft, our Chairman, President and CEO for his perspective on the markets and ARLP's outlook for the remainder of 2019.

ARLP started the year strong, posting quarter-over-quarter increases to all of our major operating and financial metrics. Total revenues for the 2019 quarter increased 15.2% over the 2018 quarter to $526.6 million on the strength of higher coal sales volumes and prices and the addition of oil and gas royalty revenues from our new Minerals segment. Higher revenues and gains related to the recent AllDale transaction and redemption of our preferred equity interest in Kodiak combined to drive ARLP's consolidated net income and EBITDA for the 2019 quarter higher by 77.3% and 57% respectively.

Looking more closely at our coal operations, increased coal sales volumes and prices led coal sales revenues 12.4% higher in the 2019 quarter to $476 million. Coal sales volumes climbed 9.8% to 10.3 million tons, reflecting strong performance at our Tunnel Ridge mine , as well as the benefit of investments we made in 2018 for additional mining units at River View and to bring our Gibson North mine back into production.

Coal sales prices were also higher in the 2019 quarter, increasing 2.3% to $46.12 per ton sold due to improved domestic and export sales price realizations in the Illinois Basin and increased sales mix of metallurgical coal in Appalachia. Increased costs related to export shipments resulted in higher transportation revenues and expenses of $30.2 million in the 2019 quarter. Our coal operations performed well during the 2019 quarter as cost control and increased volumes from our lower-cost mines drove segment adjusted EBITDA expense per ton lower by 1.9% compared to both the 2018 and sequential quarters.

Turning now to our new Minerals segment, the 2019 quarter marks the first time ARLP has separately reported results related to our oil and gas royalty business, following our January 3rd acquisition of limited and general partnership interest in AllDale I & II. As a result of this acquisition, ARLP gained control of approximately 43,000 net royalty acres in the Anadarko, Permian, Williston and Appalachian basins, and beginning with the 2019 quarter, we are now including results related to our controlled mineral interests in ARLP's consolidated results. Our Minerals segment results also include the equity method investment income we continue to realize from ARLP's limited partner interest in AllDale III.

As part of the acquisition accounting, we obtained an independent fair value determination of the interests we owned in AllDale I & II prior to the time of the acquisition. This determination resulted in ARLP recording in the 2019 quarter a non-cash gain of $177 million to reflect the fair value of our interests in AllDale I & II immediately prior to the acquisition. Including this gain, net of $7.1 million attributable to non-controlling interest, our Minerals segment contributed $171.8 million and $179 million to ARLP's consolidated net income and EBITDA respectively. And excluding the non-cash gain, adjusted EBITDA related to our Minerals segment was $9.1 million for the 2019 quarter, compared to EBITDA related to equity investment income of $3.7 million for the 2018 quarter.

One final comment on ARLP's results for the 2019 quarter. As previously announced in February, our preferred equity interest in Kodiak Gas Services was redeemed for $135 million cash. This redemption resulted in an IRR of approximately 21% on our initial $100 million investment and an increase in equity securities income to $12.9 million for the 2019 quarter, compared to $3.7 million for the 2018 quarter and $15.7 million for the 2018 year.

Finally, a quick look at the balance sheet. We ended the 2019 quarter with ample liquidity of approximately $569 million. Proceeds from the Kodiak redemption allowed us to substantially reduce revolver borrowings for the AllDale acquisition, lowering our leverage to a conservative 0.81 times ARLP's total debt to trailing 12 months adjusted EBITDA. We continue to believe our strong balance sheet provides ARLP with strategic advantages as we execute our plans and the financial flexibility and capacity to take advantage of future opportunities.

With that, I'll now turn the call over to Joe. Joe?

Joseph W. Craft -- President, Chief Executive Officer and Director

Thank you, Brian. Good morning, everyone. Alliance entered 2019 with expectations for year-over-year growth in operating and financial results, and our performance in the 2019 quarter clearly supports those expectations. As I look forward to the balance of 2019, I remain optimistic about our ability to generate strong cash flow from ARLP's coal operations and continue to expect our new Minerals segment will contribute $37 million to $47 million of EBITDA for the full year 2019.

Our coal teams performed exceptionally well to start the year despite disruptions to the river and gulf port systems caused by unprecedented flooding and high water levels. Our mining operations increased production over both the 2018 and sequential quarters, while lowering cost per ton by nearly 2%. Our marketing team increased quarter-over-quarter coal sales volumes by 920,000 tons and higher sales price realizations despite approximately 750,000 tons of planned shipments that were delayed by disruptive weather conditions. While our already strong results would have been even better without these shipment delays, conditions on the rivers and at the ports are improving, and we expect these shipments to be made up during the second quarter.

ARLP also continued to execute on its strategy of investing capital to drive long-term cash flow growth and support return of cash to unitholders. The development of our Excel Mine No. 5 into a new reserve base at MC Mining in Eastern Kentucky is progressing well and deployment of growth capital to increase production in the Illinois Basin at our River View mine and Gibson County complex is ongoing.

As announced earlier this year, we also meaningfully increased ARLP's presence in the oil and gas minerals space with our $176 million AllDale acquisition. As Brian outlined earlier, we believe the capital invested in our minerals activities thus far has already added significant value for ARLP's unitholders. The April 17, 2019 market valuation of Brigham Minerals' IPO in the oil and gas minerals sector supports our view. Brigham's properties are located for the most part in the same basins as ours. Their IPO was oversubscribed and priced at the high end of the filing range with a total enterprise value of $875 million, equal to 15.7 times their last quarter annualized EBITDA of approximately $56 million. As of last Friday's close, the market was valuing Brigham's total enterprise value at close to $1 billion, taking their multiple to more than 17.7 times. I'm excited about the many opportunities to grow this part of our business in the future. We are actively working with advisors to evaluate numerous additional investment opportunities that appear to be available in the oil and gas minerals sector this year and beyond.

Looking ahead to the remainder of 2019, our expectations for US coal markets remain intact, and we are confident in our plans to increase ARLP's sales to the -- to domestic customers by approximately 10% over 2018 levels. Internationally, we continue to believe the long-term supply demand fundamentals of the global coal markets will provide opportunities for ARLP's strategically located low-cost mines.

In the short term, however, these markets are under pressure. While we expect opportunities for coal exports to develop later this year as markets improve, it is difficult to predict the timing of when conditions will become favorable. As we wait for a rise in the market, we plan to delay the growth ramp of our Illinois Basin operations, which may reduce previously planned volumes by close to 1 million tons this year.

Assuming this reduction in coal volumes, we would expect ARLP's full year 2019 results to be closer to the lower end of our guidance ranges for coal sales and production volumes, revenues, net income and EBITDA. Even with modestly lower expectations, ARLP continues to expect attractive year-over-year growth in our operating and financial results for 2019.

It should be clear that ARLP is focused on delivering strong performance and continuing to invest in our business to create sustainable growth in cash flows. By doing so, we remain confident in our continued ability to deliver on ARLP's objective of returning cash to unitholders. The increased distributions just announced by our Board reflects this confidence and remains our primary means of meeting this objective. We also continue to have approximately $25 million remaining authorization under our unit buyback program and we'll consider additional opportunistic unit repurchases in the future depending on market conditions and other capital requirements and opportunities.

This concludes our prepared comments, and now with the operator's assistance, we'll open the call to your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question will come from Mark Levin with Seaport Global. Please go ahead.

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

All right, thanks. Congrats guys on a great quarter, particularly given the weather that you encountered. Couple of questions and mostly around the export market as you might imagine. So it looks like, Joe and Brian, you've got a couple million tons more of exports to price before the end of the year to get to, I think, what would be 11 million tons, if that's right. What is your degree of confidence that you can price those remaining 2 million tons? And then as as a follow-up, when you look out to 2020, and I realize we're sitting here only in the end of April and a lot can change between now and then, but let's just assume for hypothetical sake that API 2 doesn't really change much. What's a reasonable assumption for steam exports in 2020, if that were to occur?

Joseph W. Craft -- President, Chief Executive Officer and Director

Mark, I think -- thank you for the question. But we are confident in the demand. We're not real confident in what the market's going to do, to be candid. Currently, the market and the forward curve is in contango. So we expect that the market will improve as the year goes on. On the back half, beyond just the curve itself, you also have the sulfur discount -- high sulfur discount and other factors along the delivery chain that when you focus on margins, we're confident right now we can place that tonnage and we've factored that into our guidance for 2019.

As we look at 2020, it's -- again, we believe the market will start improving. We continue to believe the demand is there. Everything gets to the weather and gas prices and what other suppliers will do. We still do not see anyone investing in thermal to bring on new coal mines, as an example. So with the reduction in expectation for 2019 going from over 12 million down to 11 million, we would look to 2020 sort of in the same volume range of 11 million. If it declined to 10 million or so, that would obviously impact what we would do in the export market. On the domestic side, we're seeing opportunity continue to grow in that area where we believe we can pick up some market share as there is some depletion and/or higher cost operations that we believe we can compete with and pick up some market share domestically.

Looking at 2020, I would say, at this time I would anticipate volume to be comparable in 2020 to what we're projecting or guiding to in 2019.

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

Yeah. Appreciate that Joe. When you think about pricing, I know -- I'm just giving you feedback from clients that are concerned, I guess, about the potential for more export tons to come back into the domestic market, in 20 years, contracts roll off, also some concern along the lines of the production levels in the Illinois Basin with a couple of other big mines, one big one in particular that's ramping up. Do you worry in 2020 about a situation where Illinois Basin prices could be under pressure because there is increased production and maybe the export window isn't open? And if that were to happen, how would you position the Company for that?

Joseph W. Craft -- President, Chief Executive Officer and Director

On the export side in the Illinois Basin, there's only two players that are really competing in that area. Murray is tied with Javelin -- Foresight/Murray tied with Javelin who has some very strong presence in the market. I think they see the export market the way we do. The demand is there, and I think the pricing -- when you look at the world cost curve for the producers, we're still confident that the price will be there. So obviously, you can put a -- paint a downside scenario that you may have to factor but that's not the case. We think that's a low probability ourselves. But if we had to adjust to that, we would. It's easier for us to adjust than others because we've got CM units as opposed to being so reliant on longwall production.

I think that the real concern should be for those guys who are out in the high price side of the cost curve -- the high side of the cost curve. They're the ones that are going to have to pull their production out of the market as opposed to the low cost producers. So we continue to believe confidently that we can sell in that 43 million ton market, again, consolidated looking over our entire production footprint, that we'll be able to compete.

On the domestic side of Illinois Basin, there are stories of people ramping. We just don't think that they're going to ramp to that speed and we'll see what Foresight does with their Hillsborough mine, where they bring that on, and if they are going to bring that on, will they take things off. I just -- I can't predict what they're going to do. But it's our expectation now based on the market -- the demand for the export market with the people that we've relied upon in the past, that volume is available to us.

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

That's very helpful. In the past, you've been kind enough to maybe give a very, very preliminary outlook for how to think about pricing in the out years. If you look at -- obviously understanding a lot can change between now and then, but when you think about 2020 relative to the 2019 Illinois Basin price guidance that you've given, how does that look? Does that look down, flat? How do you -- where are you pricing? What do you think we should be modeling for price in '20?

Joseph W. Craft -- President, Chief Executive Officer and Director

It's still early, but based on several solicitations we're engaged in right now for the domestic market, assuming that those come in as we expect them to come in and the softness in the export market right now, I would expect our margins would be impacted $1.25 next year with our costs relatively flat, so essentially all that to medium (ph) market. So it's sort of where it would be right now plus or minus $0.25 is we're looking at at this point.

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

That's very helpful. That's very helpful because that kind of frames like if things don't get better, that's what -- which is, I'm sure, what a lot of people are looking at. And the last question is CapEx. Obviously, this is an elevated year. You have some some growth projects. In 2020 -- again, I know you guys haven't set the budget, but just trying to think ahead, would we be back toward maintenance levels again in 2020 or will there'll be some growth? I'm thinking just specifically for coal, not for oil and gas.

Joseph W. Craft -- President, Chief Executive Officer and Director

We would still have some capital for our MC mine. So some of that is actually going to be in 2020 because that's when we -- we don't expect that mine to be fully operational till the end of the year. So we will have additional capital, but that's factored into our maintenance capital number that we've given. So I guess from a growth capital standpoint, there's none in the forecast right now in our coal space. Brian, I'm...

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Yeah, that's fair. And the level of capital in 2019 obviously reflects a very active rebuild schedule, et cetera, and that does fluctuate year-to-year. So I think you'll likely see 2019 from that perspective as being a bit of a high point for the next several years.

Joseph W. Craft -- President, Chief Executive Officer and Director

Our maintenance capital (ph) factored that in.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

It does. It does (inaudible) a five-year view on maintenance, which I believe is $5.57 a ton at the moment. But that includes 2019, which as I mentioned is on a relative basis a pretty high year, given rebuild schedules, et cetera.

Joseph W. Craft -- President, Chief Executive Officer and Director

Right.

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

Okay, great. And I will squeeze one more in. Met coal production for 2019, how much met coal do you expect to sell? And then from a pricing perspective, what percentage of the benchmark do you think you will capture, if that's the right way to think about it?

Joseph W. Craft -- President, Chief Executive Officer and Director

I think last year, we were right at 1 million tons and we're -- we've got half -- we've got about 300,000 tons remaining to sell into that market to reach that same target.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

For '19.

Joseph W. Craft -- President, Chief Executive Officer and Director

For '19. So we would be looking for '19 to be at the same level as we were last year. And we don't really price off a bit (ph) index per say, but we expect that our pricing in the back half of the year is slightly lower than what we got -- what we are booked for in the first half of the year. But it's relatively small, maybe a 4% decline from the back half of the year -- the first half of the year that we built into our -- in our guidance.

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

Got it. Great. Thanks very much. Appreciate all the time.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thanks Mark.

Operator

(Operator Instructions) The next question comes from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas N. Pipes -- FBR Capital Markets & Co -- Analyst

Hey, good morning, everybody, and congrats on a great start to the year.

Joseph W. Craft -- President, Chief Executive Officer and Director

Thanks Lucas.

Lucas N. Pipes -- FBR Capital Markets & Co -- Analyst

I wanted to follow up a little bit on the updated guidance. Obviously, you maintain the ranges, but you're pointing toward the lower end. So if I think about EBITDA for example $720 million to $760 million, let's say you shifted from $740 million at the midpoint more closely to $720 million, call it $15 million, $20 million or so, on 1 million tons of reduced export sales. Is that kind of a reasonable margin to think about for the export business, $15 per ton, or am I simplifying in this conclusion? Thank you.

Joseph W. Craft -- President, Chief Executive Officer and Director

Yeah, you're simplifying, because what we're pulling off -- there's a lot of things going on in our business based on how we're pulling off that 1 million tons. And so we're actually pulling off some of our lower-priced volume into the market, but it also happens to be some of our lower-cost...

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Mines as well.

Joseph W. Craft -- President, Chief Executive Officer and Director

Mines as well. So it's hard to simplify the answer to your question and it's hard to give you this precise answer that you're looking for because we're in the market every day. So I wish I could help you better with that, but for competitive reasons, I'm not in a position to do so.

Lucas N. Pipes -- FBR Capital Markets & Co -- Analyst

That's understood and helpful. But kind of high level, would it be reasonable to conclude that export margins are similar to domestic margins in the Illinois Basin or are there some major pluses and minuses that you would point us to specifically for 2019?

Joseph W. Craft -- President, Chief Executive Officer and Director

I think that's a reasonable assumption. So they're both competing for our volume and our tonnage. But as we have moved up in the export volume, we really look at -- we've got an export book and we've got a domestic book. And so, yes, they compete on the higher end of the range, but for a base of that business, they're really not competing with each other. They're only competing within the markets they're in. So, again, it's hard to say that the margins are identical. I'd say, as you get toward the end of the year, yeah, they probably are because they're both competing for that last volume of tonnage we've got to sell into the marketplace, but I can't say that that's true for the average.

Lucas N. Pipes -- FBR Capital Markets & Co -- Analyst

Got it. Okay. That's helpful, thank you. And switch over to the Minerals side, if I understood you correctly, in the prepared remarks, you mentioned a growth rate of 77% year-on-year, but I believe that included the growth from the acquisitions. On an organic basis, what sort of growth rate should we be thinking about for that business? Thank you.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Well, obviously, it's dependent on pace of drilling, timing of completions, commodity pricing, et cetera. But look, the guidance we provided for the full year reflects the positions we own, the drilling activity that is ongoing as we speak, the number of wells that are being permitted, the disclosures by our operators in terms of their pace of drilling, so it's multifaceted. But I think at the end of the day, you can see what our equity investment income was last year. And we're seeing a meaningful ramp. I think it was in the low 20s -- $20 million range and at the midpoint of our current guidance for roughly in the $40 million range. So all in, we're seeing a pretty healthy bump, and to try to break it down to how much of that is specifically attributable to what we owned prior to the acquisition versus what we own after the acquisition is a bit difficult.

Lucas N. Pipes -- FBR Capital Markets & Co -- Analyst

Got it. Okay. Well, that gives you something to work with. I appreciate, and I'll turn it over for now. Thank you.

Joseph W. Craft -- President, Chief Executive Officer and Director

Sure.

Operator

The next question will be from Lin Shen with Hite. Please go ahead.

Lin Shen -- Hite Hedge Asset Management LLC -- Analyst

Hey, good morning. Thanks for taking the call.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Sure.

Lin Shen -- Hite Hedge Asset Management LLC -- Analyst

I have a quick question for the Minerals also. When I look at your first quarter production, about 0.25 million BOE, then you indicated that daily production is probably less than 3,000 BOE per day, and your full year guidance, the production per day is 3,500 per day. So I guess -- I can tell there's production growth (ph), but then your EBITDA guidance is basically annualized the first quarter number. So can you maybe talk a little bit about how should we reconciles production growth versus the EBITDA guidance?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Well our EBITDA guidance at the low end is the first quarter annualized. I think we're at $37 million contribution on the low end, and first quarter annualized, that's a little over $36 million. But the full year guidance reflects all of the factors that I just mentioned to Lucas. We are continuing to see drilling activity I think -- in our January call, we had 529 wells currently drilling. Today, it's about 630. We had around 900 wells permitted. Today, it's a little over 1,200. Producing wells has increased from about 3,800 in January to close to 5,200. So I don't think you can look at the first quarter annualized and tag it to the low end of the range. The high end of that range is $47 million, which reflects expectations around pace of drilling. And the activity we've seen in the first quarter relative to where we were at the end of the year at this point, I think, supports our expectations around pace of drilling. And then obviously, commodity pricing has an impact on that as well and the current strip is higher than original expectations. So it's -- there's multiple factors involved in it, Lin. But I feel pretty comfortable with both our expectations on average daily production and our EBITDA contribution from minerals as we've guided.

Lin Shen -- Hite Hedge Asset Management LLC -- Analyst

Great, appreciate it. Do you see the rig number also increase quarter-over-quarter or rig -- what was the rig number last quarter versus this quarter? What are you seeing now?

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

I don't recall exactly what the rig count was on our acreage last quarter. But I think you can equate it to the number of wells that are drilling, the increase that we've seen, but you would expect to see a corresponding increase in the number of rigs that are actually operating.

Lin Shen -- Hite Hedge Asset Management LLC -- Analyst

Great. Thank you. I appreciate it.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

You bet.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Thank you, everyone, for your time this morning and your continued support of and interest in Alliance. Our next quarterly earnings release and call will be scheduled for late July, and we look forward to discussing our second quarter 2019 results with you at that time. This concludes our call and thanks to everyone for your participation.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 32 minutes

Call participants:

Brian L. Cantrell -- Senior Vice President and Chief Financial Officer

Joseph W. Craft -- President, Chief Executive Officer and Director

Mark A. Levin -- Seaport Global Securities, LLC -- Analyst

Lucas N. Pipes -- FBR Capital Markets & Co -- Analyst

Lin Shen -- Hite Hedge Asset Management LLC -- Analyst

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