Welcome to Alliance Resource Partners LP Second Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.
I will now turn the conference over to Mr. Brian Cantrell, Senior Vice President and CFO. Thank you. You may begin.
Thank you, Sherry, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter twenty twenty one financial and operating results, We will now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we'll open the call to your questions. Before we begin, a reminder that some of our remarks today may include forward looking statements subject to a variety of risks, uncertainties and assumptions that are 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, our actual results may vary materially from those we projected or expected.
In providing these remarks, the Partnership has no obligation to 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'll also be discussing certain non GAAP financial measures. Definitions and reconciliations of the differences between these non GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which has been posted on our website and furnished to the SEC on Form eight ks. With the required preliminaries out of the way, I'll begin with a review of our results for the quarter, and then I'll turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his comments. As we reported earlier this morning, Alliance delivered strong results during the twenty twenty one quarter, posting significant increases to our major operating and financial metrics compared to the sequential quarter, Reflecting improved performance from both our coal operations and our royalty segments, total revenues increased 13.8% to $362,400,000 Net income jumped 77.9 percent to $44,000,000 or $0.34 per unit, and EBITDA climbed 25.7% to $118,600,000 Contributing to these exceptional results was the shipment of tons delayed during the sequential quarter.
If you recall our release from last quarter, shipments for 950,000 tons were delayed by weather related transportation disruptions and an unplanned customer outage, which impacted our cash flow and EBITDA by approximately $13,000,000 At that time, we anticipated customers would make up these tons over the balance of this year. With strong power demand and utilities calling on coal to meet this demand, the timing of delivering these delayed shipments was largely accelerated into the twenty twenty one quarter. Absent these timing issues, results for the 2021 and sequential quarters would have been comparable. With these increases and our continued focus on controlling costs, expenses and capital, ARLP generated $79,400,000 of free cash flow in the twenty twenty one quarter. We utilized this cash flow to return $12,700,000 to unitholders through our quarterly distribution and to reduce total debt and finance lease obligations by $59,500,000 We ended the quarter with liquidity of $500,500,000 and reduced our total leverage to 1.08x, a 32.1% improvement since the beginning of this year.
ARLP's financial and operating results for the twenty twenty one quarter and the first half of twenty twenty one were significantly improved compared to the twenty twenty quarter end period, which were negatively impacted by the pandemic. Compared to the twenty twenty quarter, total revenues increased 42% in the twenty twenty one quarter, while net income jumped by $90,700,000 and EBITDA climbed 145.9%. For the 2021 period, coal sales volumes increased 18% compared to the 2020 period, driving total revenues higher by 12.4 to $681,100,000 Reflecting ongoing cost control and efficiency initiatives at our mining operations, offset in part by increased selling expenses resulting from higher coal sales volumes, operating expenses declined to $409,600,000 for the 2021 period compared to $421,500,000 for the 2020 period. Net income increased $260,200,000 to $68,800,000 for the 2021 period, reflecting higher revenues, reduced operating expenses, lower depreciation and $157,000,000 of non cash impairment charges incurred in the 2020 period. Excluding the impact of these impairment charges, net income of $68,800,000 for the 2021 period compares to an adjusted net loss of $34,400,000 for the 2020 period.
EBITDA for the 2021 period increased 45.3% to $212,900,000 compared to adjusted EBITDA of $146,500,000 in the 2020 period. Turning from our consolidated results, let's now take a closer look at the performance of the Arrowhead's business segments. At our coal operations, sales tons increased 14.9% during the twenty twenty one quarter as strong coal demand allowed us to deliver approximately 1,000,000 tons of coal shipments delayed from the sequential quarter as I discussed earlier. Increased coal sales volumes more than offset lower price realizations, leading coal sales revenues higher by 13.4% to $326,000,000 compared to the sequential quarter. Increased volumes and the continued benefits of ongoing cost control and efficiency initiatives at all ARLP coal mines drove segment adjusted EBITDA expense per ton sold lower to $27.9 a 6.1% reduction compared to the sequential quarter.
Increased revenues and lower per ton operating expenses drove segment adjusted EBITDA for our coal operations higher by 25.7% to $113,900,000 ARLP's royalty businesses also performed well during the twenty twenty one quarter, delivering $22,200,000 of segment adjusted EBITDA, an increase of 15.3% over the sequential quarter. Of this total, oil and gas royalties contributed $15,400,000 to segment adjusted EBITDA during the twenty twenty one quarter, a sequential increase of 28.7% on the strength of significantly higher commodity prices. As expected, coal royalties delivered relatively stable results for the twenty twenty one quarter, posting segment adjusted EBITDA of $6,800,000 With that, I'll now turn the call over to Joe. Joe?
Thank you, Brian. As Brian mentioned, ARLP's operating and financial performance for the twenty twenty one quarter improved significantly compared to both the sequential and twenty twenty quarters. Looking ahead, coal market fundamentals are extremely favorable both at home and abroad, prompting us to increase our full year 2021 guidance. We are increasing the midpoint of our targeted total coal sales volumes for 2021 by 1,800,000 tons or approximately 6% to 32,900,000 tons. Over the past two months, commodity prices for each of our business segments have skyrocketed.
In our primary U. S. Markets, year over year power demand has surged 7.5% through the first half of twenty twenty one. Rising natural gas prices have driven coal consumption higher for the 2021 period. According to Argus, June coal generation in the PJM hit a three year high, while MISO and SPP grids reported increased coal demand of 3742% respectively.
For the full year, coal consumption in The US is expected to rebound 16%. Increased domestic demand is coming amidst declining utility stockpiles, constrained supply response and a robust export market. International coal demand is rising as global economic expansion post COVID-nineteen has lifted power demand and higher LNG prices have favored coal generation. IHS Markit currently projects US thermal coal exports will climb to a range of 41,000,000 to 45,000,000 short tons this year compared to 26,700,000 short tons in 2020. Alliance has responded to these favorable market conditions by significantly strengthening our contract position during the twenty twenty one quarter, booking new commitments to deliver 8,700,000 tons through 2024, including 2,500,000 tons into the export markets.
For 2021, we are targeting export sales volumes at 4,400,000 tons compared to a little less than 1,000,000 tons last year. We are actively evaluating opportunities to further increase production and sales in response to expectations for continued strong coal demand and pricing through 2022. However, the current tight labor market may limit what we can accomplish in this regard. Market fundamentals for ARLP's royalty businesses are also favorable. Increased coal sales volumes from ARLP's mining operations should benefit our coal royalty segment, and we are raising the midpoint of estimated twenty twenty one royalty tons sold by 3.3%.
For our oil and gas royalty segment, drilling and completion activity continues on our acreage with 103 new gross horizontal wells spud and 182 gross horizontal wells brought into production during the twenty twenty one quarter. As a result, we are again increasing our 2021 full year oil and gas production expectations. ARLP's oil and gas price realizations have increased throughout the year and the current forward price curve remains strong. With expectations of increased oil, gas and coal production and strong commodity pricing, we believe the contribution of our royalty segment of ARLP's consolidated results will continue to grow. With our strong year to date performance and positive outlook, ARLP is well positioned to pursue our objectives of optimizing the cash flow and value of our existing assets and pursuing growth opportunities that we believe have the potential to generate attractive returns.
That concludes our prepared comments and I'll now ask the operator to open the call for questions.
Thank Our first question is from Nathan Martin with Benchmark. Congrats
on the quarter.
I
guess first, just I'll start with a question on incremental pricing. It looks like you guys committed and priced an additional about 3,000,000 tons in the domestic side, another 2,000,000 tons or so on the export side for 2021 since the last quarter. Can you give us a sense maybe on pricing on this time?
Some of that timing is was before this recent price run up, but we were able to get some of it on the back end. We have factored that into our increased pricing on in our guidance where we increased the bottom the the lower end of the range on our average sales price. So when you look at the midpoint, I think that raises the price around 50¢ a ton for all tons. That helps you in understanding the increase in revenue for the year on a sales price basis.
Okay. Thanks, Joe. And, I mean, I guess you mentioned pricing. You know, we've had that recent increase. I mean, based on what I'm seeing out there, your own oil basin prices seem to be up, you know, maybe $7 just this month.
They're, like, the mid forties or more now, and that prices are, you know, $50 plus, and API two is, you know, hundred and $30 plus in the front month. So is that kind of similar to what you guys are are seeing in the market as well?
Yeah. It's really hard right now. I mean, there's are people that are interested in the volume, you know, trying to price some volumes for the back half. There's limited coal available. If you look at our open position at quarter end, we were right at about 1,400,000 tons I believe.
And now we're probably a million tons that we have to sell. So we are seeing pricing in that level in the current timeframe. As you look out to the fourth quarter, some people are suggesting that price would go lower. I don't really see that. I don't see how there can be inventory restocking given the tight supply in the domestic market.
So I think the pricing is going to remain very strong for the back half of this year and rolling into the first quarter. So we'll see exactly whether these utilities will in fact transact at these price levels or whether they'll just continue to draw down inventory, which also has been significantly reduced since our last call. We're in interesting times.
Got it. Appreciate that. Then I guess just if pricing does kind of remain at these levels, Joe, as you point out, and hopefully through the back half of year and the next year, maybe Brian or Joe, can you comment you know, on on potential priorities for your free cash flow?
So as we are thinking about, you know, what those would be, you know, we probably will, you know, we're not in a position to tell you exactly right now because there's so much uncertainty as to what the price is going to be next year. When you look at most of the curves, they're very heavily backwardated for next year. As I just mentioned, we think they're gonna be higher than what the the different indexes are showing. But it's you know, until we see more certainty in that regard, you know, it's hard to to respond to exactly what what our cash flow capital allocations are gonna be going into next year. So we'll be prepared at our next call to have better clarity on that, and we'll be able to address that at that time.
Okay. I appreciate that. I guess just real quickly, looking at the cost side, fantastic cost quarter for you guys, especially in Appalachia. You know, obviously, you tightened your full year cost guidance look like, but that does seem to imply some kind of cost creep in the second half. And also combine that with it looks like your shipments should be up in the second half versus the first half based based on your your guidance.
So maybe get some color on on that potential increase in costs.
We have experienced some pressure, inflationary pressures with steel, with, you know, oil, labor, availability. So there is some pressure from an inflationary standpoint in the second half. And we also have longwall move at at Teekay operation in the next quarter that is built into that. We've got some met shipments next quarter that are higher cost than what we experienced in the second quarter at Metiki. So that's weighing on the cost side.
But on the flip side with the increased production, production is primarily coming from our lowest cost mines. So you're seeing a blend to where we're still able to maintain our cost at levels consistent with what we projected beginning of the year notwithstanding some of the inflationary pressures that we're experiencing. Main question, are those transitory or not? We've had some feedback on the steel side that was suggesting that the steel surcharge that we have been living with now for a month or so And we'll follow through that will continue through the end of the year, will more than likely be lifted sometime in the first quarter based on current projections of next year.
Great. And just to clarify, Joe, when you mentioned longwall move at the cheeky next quarter, are you saying fourth quarter? Or are you saying No. May, third quarter. Yes.
Sorry. Third quarter. Yep. Got it. Appreciate it, guys.
And then just one last final question. I mean, noticed you raised your CapEx budget by about $5,000,000 looks like. Can just elaborate maybe on what's driving that small increase? That's all. Thanks.
Think don't know, Brian, do you have details on that?
Yes. I think the fact that our production is increasing, maintenance capital will be a bit higher over the back half of the year than we originally anticipated. But to your point, Nate, it's a relatively minor increase, and we're just trying to reflect that increased production level.
Perfect. All right, guys. Again, always appreciate the time, and best of
luck in the third quarter. Thank you, Nate.
Our next question is from Matthew Fields with Bank of America. Please proceed.
Hey, everybody. I appreciate that you're still seeing a little bit of uncertainty in futures prices to talk up too detailed about capital allocation. But, you know, you've you've historically kind of talked about one times leverage as kind of a comfortable level for you all, and you hit it this quarter. So just wondering kind of where you think about leverage going forward. Are you comfortable kind of here?
Do you want to take that 1x leverage and maybe take it lower? Or are we going to see increased use for investment or shareholder returns now that you've hit that bogey?
Yeah. I mean, we're continuing to focus significantly on growth. There are several opportunities we're pursuing as we speak. So I think growth continues to be front of our mind. I think that paying down debt, we pay down more than we anticipated based on our strong performance in the first half.
And we'll continue to do that. I think we will relook at the distributions as we think about what our cash flows will be in 2022 starting probably in the next you know, at our next meeting. So we'll have more clarity on that. But, you know, our target has always been at a onetime level. If we do these acquisitions, every one of them we're looking at are accretive.
However, you know, they could pop up our coverage ratio for a small time, but we would be focused on maintaining or getting back to a onetime level target. And so the key question again is back to what our commodity price is going to be and what kind of volume can we bring to the market in 2022 going forward. So we're you know, again, labor is short and it's tight. I don't know when the federal additional benefit is removed in September, whether that's gonna help this, know, infrastructure bill. If that's passed and then there's more stimulus, what that's gonna do to labor demand, it's you know, I've never seen anything like it in my career to where you've got plenty of jobs and yet you still have people that are on the unemployment rolls not wanting to work.
So, hopefully, we'll get back to encouraging people to make an economic contribution to our country and get back into the labor pool so we can take advantage of these opportunities.
Thanks. Speaking of labor, we've seen a kind of a pickup in kind of union activity in the steel sector. One of your fellow coal miners in Alabama is going, you know, over a hundred days on a strike now. Can you just talk about kind of when when you have collective bargaining agreements, you know, coming due? What are the you know, how how are the relations with your union workers and kind of what you expect to see for continuing to keep your labor force in the mind?
So we're a nonunion operator. Yeah. So we've been union free since inception 1971. So we do we do not have any labor contracts. We're very focused on having a culture of of focused on trying to have, you know, great relationships with our employees, and you know, we continue to do that by constant communication.
And so as I mentioned, you know, there is a shortage where we would like to be able to grow. And, unfortunately, you know, it's just it's tough finding people who wanna enter the coal business right now in large part because of all the news headlines, I believe. And we're trying to convince our customers to come forward and enter into longer term contracts or at least give a shout out to to our employees to let them know that they're needed for the next two decades. And we were able to to have one of our customers do that last Friday. And it was very well received.
So from a labor perspective, our key issue is just trying to ensure to our our employees and any prospective employees that they've got a future in co industry for the next twenty years. And I believe they do, but, you know, it would be nice if we can get some further commitments from our customer base that reinforces that long term view for our employees.
Alright. Great. That's that's very helpful, and good luck in the rest of the year.
Thank you.
Our next question is from Bill Gushard with Atlas Merchant Capital. Please proceed.
Hey, guys. Congrats on a great quarter.
Hi, Bill. Good morning.
Good morning. Can you discuss a little bit about the investment you've made historically into the royalty portfolio, specifically oil and gas? I think you added to that, you know, you added to that exposure the end of nineteen, and I don't think we've really seen the full EBITDA or free cash flow potential. And maybe discuss also what you what you think the stand alone value of that might be just based on what you're seeing in the market for valuations?
Yes. Stand alone value, if you look at the other pure play oil and gas royalty companies, you're seeing trading multiples in the high single digits, low double digit type area. So if you look at our current expected cash flow out of
our royalty
business, you can do the math, we're clearly not, in our view, getting the full value for the cash flow that those assets are bringing to the table. At our current EBITDA this quarter of twenty two point two million run rate close to $165,000,000 The math is pretty compelling in terms of what the overall value is. And you're correct, we have not made additional investments in that since late twenty nineteen. Obviously, the market collapse during the pandemic, cessation of drilling, shut in of production, etcetera, availability of assets at that point in time really just dried up. We are beginning to see increased activity as commodity prices have improved.
As we mentioned in our prepared comments, drilling activity, while not back to pre pandemic levels, has certainly picked up. And we're hopeful we are seeing opportunities come across our desk that may make some sense. And we're hopeful as that market continues to reopen that we'll be able to transact.
Good stuff. Thanks.
You bet, Bill. Thank you.
We have reached the end of our question and answer session. I would like to turn the conference back over to Brian Cantrell for closing comments.
Thank you, Sherry. We appreciate everyone's time this morning as well as your continued support of and interest in Alliance. Our next call to discuss our third quarter twenty twenty one financial and operating results is currently expected to occur in late October, and we hope you'll join us again at that time. This concludes our call for today. Thanks to everyone for your participation.