Joe Craft, president and CEO of ALRP, told analysts during an April 29 conference call that domestic coal markets in general “continue to face stiff headwinds.” With natural gas prices still in the range of $2.60/mmBtu, coal-to-gas switching has persisted and the result has been “extreme coal on coal competition,” he said.
Comparatively speaking, ALRP’s Q1 financial performance exceeded that of most of its competitors and Craft said his company was well-positioned to achieve its financial goals for the year, including growing cash flow again.
Q1 net income totaled $106.5 million, down from $115.9 million a year earlier. Alliance anticipates total 2015 revenues, excluding transportation revenues, in a range of $2.35 billion to $2.41 billion, and net income in a range of $395 million to $455 million.
Because Alliance expects coal markets to remain “challenged” for the balance of 2015, it is cutting production and sales projections to bring a burgeoning coal inventory at its mines more in line with historic levels.
According to Brian Cantrell, Alliance senior vice president and CFO, rail and barge shipping delays early this year, largely related to the weather, caused sales volumes to fall and drove inventories higher by more than 1 million tons.
“We do expect to ship about 800,000 tons above our production in the upcoming quarter,” Cantrell added.
Alliance produced 10.5 million tons in the January-March period, up 2.4% from 10.2 million tons in the year-ago quarter. Sales totaled 9.5 million tons in the latest quarter, compared to 9.49 million tons in the first quarter of 2014, a 0.1% increase.
The Tunnel Ridge longwall mine in West Virginia and Ohio continues to exceed expectations, Cantrell said, leading Northern Appalachian output higher by 13% in Q1. The Gibson South underground mine in southern Indiana, which began production a year ago, and the River View and Mettiki underground mines in western Kentucky and West Virginia, respectively, also had good production, he said.
Another operation that contributed to the favorable Q1 financial picture was the new White Oak No. 1 longwall mine in southern Illinois. Alliance is a major financial investor in the mine operated by privately owned White Oak Resources. At peak production, the mine is expected to produce more than 6 million tons of steam coal annually.
Craft said Alliance is reducing production by about 700,000 tons for the rest of this year, to an annualized range of 40.2 million to 41.2 million tons. Sales volumes also have been pared back to a range of 40.75 million to 42.65 million tons. The company has committed and priced approximately 96% of its anticipated coal sales for 2015 and also has secured coal sales and price commitments for about 28.9 million tons, 12.8 million tons and 9.6 million tons in 2016, 2017 and 2018, respectively.
Coal prices, he said, have continued to decline in both the Illinois Basin and Northern Appalachia, “anywhere from 10-15% in the spot market.” And while natural gas prices continue to be low, “there are signs that natural gas prices might start to increase in the 2016-17 time period to a level that [gas producers] can make money.”
He added: “I think what we’re seeing in today’s short-term market is not sustainable. It’s just a matter of a shakeout. We in the coal space will have to make a decision about what level of utility demand we’ll anticipate. Natural gas prices will be a catalyst.”
For coal prices to rise, Craft, as he has before, said Central Appalachian coal production needs to decrease, a move he believes would help other coal basins. “When you think about total production in the Illinois Basin and Northern Appalachia, the real driver is Central App. Most people project it will drop to the 80 million tons level” annually from the current 100 million tons or so. In addition, “there 5 to 10 million tons in the Illinois Basin and Northern Appalachia that has to come off also.”