We recently compiled a list of the 10 Best Coal Stocks To Buy Now According to Short Sellers. In this article, we are going to take a look at where Alliance Resource Partners, LP (NASDAQ:ARLP) stands against the other coal stocks.
Coal is highly valued for its energy content and is widely used across the globe for electricity generation, as well as for the production of steel and cement. It is extracted using either the opencast or underground mining methods.
The thermal coal sector experienced a year-to-date (YTD) decline of 0.47%, in contrast to the broader market’s 19.55% increase. The coal industry has been grappling with significant challenges, leading to its underperformance in recent years. One of the primary reasons is the sharp decline in coal usage for electricity generation in the U.S., as utility operators increasingly shift toward renewable energy sources and focus on decarbonization. The planned retirement of coal units and stricter emission regulations, aimed at achieving carbon-neutral electricity by 2030, have further accelerated this decline. With coal’s share in the U.S. power generation expected to drop to just 14% by 2025, the industry faces mounting pressure as demand continues to dwindle domestically, according to a report by the Energy Information Administration.
Despite these headwinds, there are potential signs of recovery, especially on the global front. U.S. coal exports are projected to grow as demand rises in European markets, partly driven by the ongoing Russia-Ukraine conflict. Additionally, the expected rebound in global steel production, which heavily relies on coal, is likely to boost export volumes.
Coal Industry Outlook
Coal has long been valued for its role in reducing poverty by providing job opportunities in regions with few employment prospects. In addition, coal mining stimulates economic growth by attracting investment and generating local government revenue.
While “green companies” have advocated for wind and solar power as the cheapest forms of electricity, claiming that transitioning to renewables is key to achieving net-zero emissions, the reality has proven different. The transition to renewable energy has struggled to address the “Energy Trilemma,” which emphasizes balancing energy security, affordability, and sustainability.
Nevertheless, Ember’s Global Electricity Review 2023 predicts that wind and solar energy will replace coal by 2030, contributing 41% to global electricity generation, a significant jump from 2021. This shift will require coal generation to decrease by 54% and gas generation to decrease by 24%. At the same time, global electricity demand is expected to rise, with an average annual increase of 3.7% from 2021 to 2030.
With 60% of its electricity powered by coal, China’s share of global electricity consumption is expected to rise to one-third by 2025, up from one-quarter in 2015, according to the International Energy Agency. However, according to Sinopec, China’s coal power consumption is expected to halt its growth by 2025, with non-fossil fuel sources predicted to dominate the country’s power mix by 2045. Check out our article ‘25 Largest Coal Producing Countries in the World‘ on Insider Monkey. You’ll find that China, India, and Indonesia are the top three coal producers, with China leading global coal production for decades and expected to continue dominating in the foreseeable future.
Coal Power Stays Important in the U.S. Energy Mix
The European Electricity Review of 2024 reported a record 19% drop in fossil fuel generation last year, with coal and gas generation experiencing an unprecedented decline. Coal generation declined by 26%, accounting for just 12% of the EU’s electricity mix in 2023, while gas generation dropped by 15%, accounting for 17%.
Similarly, the U.S. coal-fired power generation reached its lowest level in four years during the first four months of 2024 but still accounted for 15.6% of the national power mix. While coal output continues to decline, renewable energy growth, particularly wind power, has been slower than anticipated. This has kept coal’s share significant, even as the country moves toward cleaner energy sources.
Methodology
To compile our list of the 10 Best Coal Stocks to Buy Now According to Short Sellers, we ranked the holdings by the percentage of outstanding shares that were sold short. Stocks with the lowest short interest were then chosen. Additionally, we included the number of hedge funds that had invested in these stocks at the end of the second quarter of 2024, according to Insider Monkey’s database. The stocks are ranked in descending order of short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A coal-loading terminal with trucks lined up to be loaded.
Alliance Resource Partners, LP (NASDAQ:ARLP)
Number of Hedge Fund Holders: 5
Short % of Shares Outstanding: 3.24%
Alliance Resource Partners, LP (NASDAQ:ARLP) is a diversified energy company and the largest coal producer in the eastern U.S., providing reliable and affordable energy to major utilities, as well as metallurgical, and industrial users both domestically and internationally.
In Q2 2024, Alliance Resource Partners, LP (NASDAQ:ARLP) reported a total revenue of $593.4 million, down 7.6% from the previous year. This decline was largely attributed to delayed coal shipments and lower export demand. Coal sales volume dropped by 11.8% YoY, with production down 10.2%, but was slightly offset by a 3.8% increase in coal sales prices due to improved domestic price realizations.
Net income for the quarter fell to $100.2 million, down from $169.8 million in the previous year, primarily due to higher operating expenses. The increase in expenses, particularly in the Appalachian region, was driven by challenging mining conditions and longwall moves.
In terms of liquidity, Alliance Resource Partners, LP (NASDAQ:ARLP) strengthened its balance sheet by issuing $400 million in senior unsecured notes and redeeming $284.6 million in debt, boosting liquidity to $666 million.
In January 2024, Alliance Resource Partners and Infinitum announced a partnership to introduce motor technology to the mining sector. This move aligns with the company’s goal of enhancing productivity and cutting operational costs while also supporting efforts to decarbonize and electrify heavy machinery.
Despite declining profitability, Alliance Resource Partners, LP (NASDAQ:ARLP) saw an uptick of 1.89% over the past month and 14.73% YTD, likely driven by a strong liquidity position and increasing coal sales prices. In addition, the company’s growth prospects in its oil and gas royalties segment, coupled with rising electricity demand, have bolstered investor optimism for long-term potential.
As of Q2 2024, five hedge funds with a combined investment of $93.1 million are bullish on the stock, according to Insider Monkey’s database. ARLP is among the best coal stocks on our list.
Overall ARLP ranks 5th on our list of the best coal stocks to buy according to short sellers. While we acknowledge the potential of ARLP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ARLP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.