Units of Alliance Resource Partners LP (NASDAQ: ARLP) rose as much as 20.9% today as crude oil prices rallied nearly 20% on hopes that Saudi Arabia and Russia could significantly curtail production. The partnership is a leading producer of coal in the United States, and coal prices are heavily influenced by crude oil prices.
Saudi Arabia and Russia have been engaged in a war over production volumes and pricing since early March. The who-blinks-first dispute has kept the taps open for two of the world's largest oil producers just as the 2020 coronavirus pandemic saps global demand for transportation fuels and refined products. A resolution is inevitable given the current landscape, but even an end to the pricing war won't be enough to lift energy prices back to levels from the beginning of the year.
As of 3:02 p.m. EDT, the former dividend stock had settled to a 11.5% gain.
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Alliance Resource Partners recently announced a series of operational changes in response to the uncertainty stirred up by the 2020 coronavirus pandemic. The coal producer will seek to match full-year 2020 production volumes with minimum purchase commitments of 28 million tons. That's far below the company's initial full-year 2020 production guidance of about 36.5 million tons, although guidance has been withdrawn.
The partnership also suspended its quarterly distribution of $0.40 per unit in an attempt to prepare its balance sheet for increased uncertainty. Units of Alliance Resource Partners had sported an annual distribution yield of over 10% in recent years, which drew the attention of many investors. Units fell to more than 20-year lows after the announcement was made.
Rising crude oil prices should lead to rising coal prices, too. That would be a positive development, but it might be insufficient in the grand scheme of things. Coal consumption will likely plummet in 2020 due to both long-term factors (the rise of natural gas and renewables in the electric power sector) and short-term factors (industrial output is limited during the pandemic).
Despite the poor market environment for coal, Alliance Resource Partners operates a comfortably profitable business with healthy cash flow. That suggests the partnership will be able to reinstate its distribution in the future, although individual investors cannot be sure when that might be. Long story short, an end to the crude oil price war between Saudi Arabia and Russia could lead to rising energy prices, but that alone won't swipe away all of the uncertainty facing the company.
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