The demand for coal, and thus its price, is expected to increase both in China (the largest producer in the world) and overseas, driven by a strong increase in the demand for electricity, higher natural gas prices and a lack of supply that is affecting the energy markets globally. These factors are being triggered by the strong recovery of economic activities around the world, as well as supply chain issues resulting from the pandemic.
Newcastle coal futures records the price per metric ton of coal at $231.50 as of the writing of this article. Coal prices are expected to move up over the upcoming weeks, likely reaching $270 before the end of October 2022, according to economists.
Thus, investors looking for opportunities in the energy sector may want to consider publicly traded producers of coal, as their share prices should go up significantly in response to the strong bull market for the commodity.
Based in Tulsa, Oklahoma, Alliance Resource Partners LP (ARLP, Financial), the second-largest producer of coal in the eastern region of the United States, is a good candidate to increase exposure to the commodity, in my opinion. Shares were changing hands for $11.82 apiece at close on Wednesday for a market cap of $1.50 billion and are poised to continue to grow over the next months as operations are yielding a high rate of return. The stock also beats most of its competitors in terms of a higher 12-month Ebitda margin (32.33% versus the industry's average of 20%).
The company has lifted its expectations for the full year of 2021. Alliance Resource now hopes to hit coal sales volume of 32.2 million to 33.6 million tons, reflecting a 5.7% jump from the prior guidance range. To meet its sales target, Alliance Resource will mine the commodity from the seven mines it owns and operates in Illinois, Indiana, Kentucky, Maryland and West Virginia, which together account for 1.65 billion tons of coal in proven and probable reserves. The company is supplying coal for utilities and industrial usage to markets in the U.S. and internationally.
Alliance Resource also generates income from royalties the company receives on the oil and gas produced in strategic regions of the U.S., including the Permian, Anadarko and Williston basins. With oil and gas prices increasing, the outlook for the royalty business segment of the U.S. coal miner holds positive as well. The company targets income royalties from approximately 800,000 barrels of oil, 2.9 million cubic feet of natural gas and 305,000 barrels of liquid gas.
The stock grants a forward dividend yield of 1.69% as it currently pays quarterly dividends of $0.10 per common share, with the most recent distribution dated Aug. 13.
The stock is not cheap as the current share price trades above the 50-day moving average value of $10.47 and the 200-day moving average value of $7.77. However, the upside potential looks so good that even with these market valuations, I believe the stock still represents a good value.
