Alliance Resource Partners saw thermal coal sales fall to 7.4 million st in first-quarter 2016, a 21.5% decline from a year ago, although prices showed a slight increase from late 2015, the company said Tuesday.
During a conference call with analysts to discuss earnings, Joseph Craft III, president and CEO of the Tulsa, Oklahoma-based company, affirmed Alliance's full-year 2016 production forecast of 33.7 million st to 35.7 million st and a sales forecast of 34.6 million st to 38.1 million st.
Craft also said Alliance expects to raise production by "a couple million tons" in 2017, most likely by picking up expiring sales contracts with electric utilities.
In the January-March period, Alliance's sales were about 600,000 st below the company's plan "as customers deferred scheduled shipments to reduce burn caused by the mild winter weather," Craft said. That affected the company's EBITDA by about $12 million.
"Coming into 2016, we expected lower coal demand for our Illinois Basin and Northern Appalachian markets due to tepid power demand, persistently low natural gas prices, excess utility stockpiles and regulatory impacts," he said. "Mild weather conditions during the 2016 quarter exacerbated these conditions, keeping the coal markets oversupplied and intensifying pressure on producers to curtail supply."
Alliance idled its Onton and North Gibson underground mines in Hopkins County, Kentucky, and Gibson County, Indiana, respectively, in Q4 2015, along with the planned depletion of reserves at its Elk Creek underground mine in Hopkins County.
In Q1, the company's River View, Pattiki, Warrior and Hamilton underground mines, all in the high-sulfur Illinois Basin, and Tunnel Ridge and MC Mining deep operations in Appalachia, had lower production.
Alliance fetched an average price of $53.82/st on Q1 sales, down 1.2% from $54.49/st in Q1 2015, but up 2.1% from $52.70/st in Q4 2015.
Production costs also dropped, averaging $33.96/st in the latest quarter, compared with $35.21/st a year ago. Expenses averaged $33.19/st in Q4 2015.
BANKRUPTCIES COULD PROVIDE PURCHASE OPPORTUNITY
Craft, in response to a question about coal industry bankruptcies, including Peabody Energy's recent Chapter 11 reorganization filing, suggested lenders may apply pressure on bankrupt companies to sell marginal or money-losing mines, providing a potential purchase opportunity for a company like Alliance with a healthy balance sheet.
"There will be an acceleration of supply going down as lenders evaluate the cost of existing operations and whether they should continue to produce with high-cost mines," he said.
Before producers regain leverage with customers in the ILB and NAPP, though, another 20 million st or so of supply "needs to come off or demand needs to go up to eradicate this overhang," Craft said.
He said Alliance has secured commitments for an additional 782,000 st in 2016 and 2.35 million st in 2017.
"We believe we will have an opportunity to increase our production next year because there are a couple of contracts expiring that we believe we will get," he said. "We can increase production by a couple million tons [in 2017]."
Stifel analyst Paul Forward said in a note that Alliance "remains fully committed and priced for 2016 with 34.5 million tons of coal contracted, with an additional 21.5 million tons committed and priced for 2017, up slightly from the previous position of 19.1 million tons."
Forward added that Alliance has seen signs of increased buying interest for 2017.
In Q1, Alliance recorded net income of $47.3 million, or 36 cents/share, down 56% from earnings of $106.4 million, or 92 cents/share, a year earlier. Quarterly revenue was $412.8 million, versus $560.4 million in Q1 2015, a 26.3% decline.
