Alliance Resource Partners Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2023

There are 8 speakers on the call.

Operator

Welcome to Alliance Resource Partners LP Second Quarter 2023 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 Carey Marshall, Senior Vice President and Chief Financial Officer.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its 2nd quarter 2023 financial and operating results and we will now discuss those results as well as our perspective on current market conditions and outlook for Following our prepared remarks, we will open the call to answer your questions. Before beginning, A reminder that some of our remarks today may include forward looking statements subject to a variety of risks, uncertainties and assumptions 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 1 or more of these risks or uncertainties materialize Or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. And in providing these remarks, the partnership has no obligation to publicly 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.

Speaker 1

Finally, we will also be discussing certain non GAAP financial measures. Definitions and reconciliations of the differences between these non GAAP Financial measures in 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 8 ks. With the required preliminaries out of the way, I will begin with a review of our results for the Q2, then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer for his comments. Our strong performance in the 2023 quarter included consolidated revenues of $641,800,000 which were up 3.5% versus the prior year period. The year over year improvement was driven primarily by higher coal sales price per ton, which was up 5.7% versus the 2022 quarter and continues to reflect the positive impacts of our contracted order book.

Speaker 1

On a sequential basis, total coal sales price per ton was down 7.9% or $5.41 per ton. This was primarily due to approximately 500,000 higher priced 2022 carryover tons Shifting the sequential quarter at our Tunnel Ridge mine in Appalachia. In our royalty segment, total royalties were $50,000,000 Down 8.3% year over year and down 2.1% sequentially as lower realized oil and gas commodity pricing was partially offset by increases in coal royalty revenue per ton. Specifically, oil and gas royalties average realized sales price This declined 40.2% per BOE versus the 2022 quarter as NYMEX WTI benchmark pricing peaked during June 2020 Sequentially, oil and gas royalties average sales prices were 4.7% lower per BOE. Coal royalty revenue per ton increased 17.4% versus the 2022 quarter and 5.5% sequentially.

Speaker 1

As it relates to volume, coal production increased 5.8 percent to 9,400,000 tons compared to the 2022 quarter, While coal sales volumes decreased 0.3 percent to 8,900,000 tons, resulting in a build in coal inventories of 500,000 tons During the 2023 quarter. Compared to the sequential quarter, wholesale volumes increased 5.1% due to higher sales volumes in Appalachia. There were no longwall moves at our Tunnel Ridge mine in Appalachia this quarter, whereas we had 2 moves in the sequential quarter. Coal royalty tons sold declined 2.8% year over year. Oil and Gas royalty volumes were 40.6 percent higher on a BOE basis due to increased drilling and completion activities on our net acreage and the acquisition of oil and gas mineral interest from Jason Belvedere during the second half of twenty twenty two.

Speaker 1

Turning to costs, segment adjusted EBITDA expense per ton sold for our coal operations was $37.85 an increase of 7.8% versus the 2022 quarter, primarily due to higher labor Related expenses, higher maintenance costs as well as the impacts of increased sales related expenses due to higher sales price realizations. These costs were partially offset by lower materials and supplies expenses during the 2023 quarter. On a sequential basis, cost per ton were 4.6% lower primarily on the strength of the additional Appalachia volumes from our lower cost Tunnel Ridge mine. 2023 quarter net income and EBITDA increased 3.8 was more than offset lower realized prices in oil and gas royalties along with the inflationary pressures I previously described. Now turning to our balance sheet and cash flow, Alliance had another strong quarter of cash generation with $153,500,000 of free cash flow before growth investments Our total and net leverage ratios were 0.4 and 0.14 times respectively total debt to trailing 12 months adjusted EBITDA.

Speaker 1

Total liquidity of $717,200,000 remains strong at quarter end, which included approximately $284,900,000 of Our robust cash generating power is affording us many options to attractively deploy capital. During the 2023 quarter, we paid our quarterly distribution of $0.70 per unit equating to an annualized rate of $2.80 per unit that we expect to maintain throughout the year. This distribution level is unchanged sequentially and up 75% year over year. Additionally, we remain committed to prudently managing the outstanding balance of our senior notes due May 2025. During the 2023 quarter, we repurchased $34,200,000 of senior notes.

Speaker 1

In July 2023, we redeemed another $50,000,000 of senior notes at par. As a result, we ended July with $289,200,000 in aggregate With available cash flows over the next several quarters. As we turn to our updated full year 2023 guidance detailed in this morning's release, I'd like to spend a few minutes discussing the current state of our markets. As we mentioned earlier in the year, the mild winter and slower start to summer sequentially and remained significantly below the year ago quarter. Lower natural gas prices affected coal burns due to more competitive gas fired dispatch Options for our customers, particularly during spring shoulder demand season.

Speaker 1

Since the end of the 2023 quarter, We've seen a turn in weather patterns with historically high temperatures blanketing much of the U. S. And portions of Europe. A hot summer doesn't necessarily dramatically impact coal burns in the Near term as our customers' units typically run baseload during summer peak demand, but it can highlight the vulnerability of the grid when demand is high And renewable sources are unable to adequately respond. Furthermore, if hot weather persists into the fall, It can change normal burn schedules and accelerate coal consumption reducing inventories heading into winter.

Speaker 1

Overall, based upon the strength of our year to date results, our contracted committed tons and a relentless focus on cost control, We remain optimistic 2023 will be another record year for ARLP. As we updated our 2023 full year guidance ranges, The mild market conditions I just described caused some movement in contract deliveries and shifted the mix between export and domestic markets. We now anticipate ARLP's overall coal sales volumes in 2023 to be in a range of 35,500,000 to 36,000,000 tons, down from the previous range of 36,000,000 to 38,000,000 tons. Illinois Basin volumes have been adjusted to reflect Lower volumes at our Gibson and Riverview operations, while our Appalachia volume guidance reflects an extended longwall move at our Metiqui mine. Our committed tonnage for full year 2023 is 34,500,000 tons at the end of the quarter or 96% to 97% of our anticipated sales done.

Speaker 1

Of that total, 4,800,000 tons are currently committed to export markets. The balance of unsold tonnage levels is expected to be supplied in the export markets primarily from our lowest cost operations, thereby still generating attractive margin. Sales pricing for the year is anticipated to be slightly lower than at the time of our last update. We've chosen to modestly adjust the top end of our range for average coal price realizations down by $1 to a new range of $65 to $66 per ton versus $65 to $67 per ton previously. On the cost side, solid execution from our operations team allows us to improve our outlook per segment adjusted EBITDA expense per ton by $1 to a new range of $38 to $41 per ton.

Speaker 1

Within Appalachia, we do anticipate higher costs in the back half of the year due to the extended longwall move at Metiqui in the 3rd quarter as well as a normal longwall move scheduled for our Tunnel Ridge mine in the Q4. In our Oil and Gas Royalty segment, We are reiterating our volume guidance ranges for the full year 2023 and we also made a number of adjustments to our outlook including lower DD and A, will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Speaker 2

Thank you, Carrie, and good morning, everyone. I want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication, which allowed us to post solid results for the quarter and the first half of twenty twenty three. Their efforts helped us deliver year over year improvements in coal production, realized coal prices, oil and gas royalty volumes, Net income and EBITDA. Our year to date results have been impressive despite coal demand both domestically and globally Being lower than we expected entering this year due to a slower economic growth, mild weather in our targeted markets and lower natural gas prices. The strong first half performance was led by significantly higher coal sales price per ton, which rose by 21.8 percent resulting in total revenues in the 2023 period Increasing by 20.4 percent to $1,300,000,000 compared to $1,100,000,000 for the 20 20 2 period.

Speaker 2

The year over year improvement in realized coal prices reflects the positive impacts of our contracted order book. Segment adjusted EBITDA expense per ton sold for our coal operations for the first half of twenty twenty three was $38.73 an increase of 15% versus the 2022 period primarily due to inflationary Our net income and EBITDA rose sharply in the 2023 period, increasing 79% and 29.6% respectively over the 2022 period. These increases reflect higher sales volumes in both coal and oil and gas royalties as well as higher price realizations in coal, Which more than offset lower realized prices in oil and gas royalties along with the inflationary pressures that Cary previously described. As Carrie also mentioned, we have adjusted our production targets lower for this year in response to lower domestic demand driven by lower natural gas prices. We are now operating 4 production units at our Gibson South mine, down 1 unit from the original guidance in January 2023.

Speaker 2

At Riverview, we have moved some units from production mode to construction mode To accelerate the timing of the previously announced expansion project at Riverview. In June, we had a groundbreaking event for the new Henderson County mine site where the new shaft will connect through underground conveyors to eventually be conveyed to the Riverview prep plant and barge terminal. This project is now scheduled to be completed at the end of 2024. Committed and priced sales tons currently represent 96% 97% of our updated guidance range and we plan to sell any remaining uncontracted tonnage primarily into international markets. While our view of export sales volume opportunities has not changed, Pricing has been more volatile than previously expected.

Speaker 2

Accordingly, we have adjusted the top end of our coal sales price per ton sold range downward upon the recent market analysis. On the positive side, we are also lowering our cost estimates by the same amount per ton So for the year as our team continues to find ways to reduce expenses in a stubbornly volatile inflationary environment. During the 2023 quarter, we agreed to sell an additional 8,600,000 tons with multiple customers for coal to be delivered over the 2024 to 2026 time period. As we can see in our updated sales guidance, We committed meaningful tonnage in 2024. We expect contracting activity to continue in the coming months.

Speaker 2

As of the end of the second quarter, we have committed to sell 25,500,000 tons domestically in 2024 And 1,400,000 tons to international markets, representing an increase of 3,500,000 tons from our last update. We also committed and priced a total of 5,100,000 tons for delivery in 20252026. Our contracting customers continue to value the certainty of supply we provide across all market conditions. The modest guidance revisions this quarter have not changed our view that we still are on track to achieve record financial results this year. As we look beyond 2023, we are encouraged by growth opportunities being pursued by our new ventures group, The recent increase in the forward oil and gas price curves and acquisition prospects for our oil and gas royalty segment.

Speaker 2

We are also seeing stability for coal demand over the next several years. Many of our customers are projecting significant growth And electricity demand is record numbers of new manufacturing facilities are being announced to come online over the next several years. All of these announced projects require exceptionally large electrical loads, adding to the reliability concerns of the stakeholders responsible for meeting the rising energy needs of their customers. The increased electricity demand Should lead to slowing the premature closing of coal fired power plants in the Eastern United States. We also expect the growth in LNG terminals coming online over the next 5 years will support higher domestic natural gas prices, further supporting stable demand expectations for our coal segment over the next 5 to 10 years.

Speaker 2

In closing, I'm pleased with ARLP's solid first half results and encouraged by the opportunities in front of us. We continue to add to our heavily contracted coal book at attractive levels and our robust cash flow generation positions Continue improving our balance sheet and pursue attractive investments to meet the evolving energy needs of tomorrow. Looking forward, we believe ARLP is well positioned to deliver solid growth and attractive cash returns to our unitholders in 2023 and beyond. That concludes our prepared comments and I will now ask the operator to open the call for questions.

Operator

Thank Our first question is from Nathan Martin with Benchmark Company. Please proceed.

Speaker 3

Hey, good morning, Joe, Carey. Thanks for taking my questions.

Speaker 2

Good morning. Good morning.

Speaker 3

First, great job on the cost side. However, similar to the Q1, 2Q shipments, A little bit lower than I expected, especially based on production. So maybe a bit of a multipronged question to start. First, Anything behind the additional 500,000 tons of inventory built? You guys did mention reduced export sales.

Speaker 3

2nd, do you feel confident shipments will pick up in the second half over the first half? What do you expect that sales cadence to look like in 3Q, 4Q? And then finally, is there any risk to further sales guidance cuts based on your conversations with utilities at this point? Thanks.

Speaker 2

So I'll try to remember all your questions. So let me go ahead and give you The answer is here and then I'll follow-up to see if I make sure that I covered everything you ask. But specifically to the first half, Our production was running on a higher clip through the Q2. And as a result, that's the primary reason for our increase to the 500,000 ton inventory level. So our actual contract book has been run consistent has been running consistent With what our ratable requirements are under the contract.

Speaker 2

So if we look at our contracts and look at our average We're right at 99% of what we should be under the contracts, which is really good because there's always certain issues that people have to deal with. So we feel very good about our customers Adhering to the contract terms in the first half and as we look to the second half, we expect the same. I think that there are a few customers That are constantly asking us for deferrals. However, I believe all our customers Appreciate what we did for them in 2022 and they understand that they should do the same thing for us this year. As we think through the biggest issue, I guess, on timing gets into the export market, we have a couple of customers that are Definitely committed to take the volume.

Speaker 2

The timing is somewhat lumpy and that does impact It's about 500,000 tons of inventory. I would not expect that to grow beyond what would be normal. When we entered into this year, we had about a 500,000 tons carryover and most of that was just Tied to timing of vessel shipments and other methods. So I think as we look at this year Trying to factor in what we think the demand for export is, what we think the contract takes under our contracts would be. We believe we're on track to our current guidance in the way I would measure any variability to that and we wouldn't We don't expect it to be greater than what our 500,000 ton was last year.

Speaker 2

It's always possible for things to change, There's a lot of encouraging signs as we look at the last 12 months. 1 for comparison, When you compare 2022 against 2023, about this time last year, we saw customers starting delay and defer Coal tonnage, so when you start looking at comparisons in 2023 versus 2022, you're not going to see the significant difference as what we saw in the first half On coal shipments in our view, we've seen this hot spell in July and that doesn't seem like it's going to abate anytime soon. So we think that's going to be positive for Colburn's. The natural gas forward curve is still approaching 3 50 at the end of the year, which is constructive and going into the winter, depending on exactly how long this heat wave Goes and really what happens in the economy. We believe that we're well positioned Running into 2024.

Speaker 2

So overall, I'm very pleased with our customers and their willingness to Continue to take under the terms of our contract. I'm optimistic that the guidance we've given that there should not be any further adjustments On demand, we will be, as we said in our prepared comments, slowing down production. So, Kerry, I don't know if you want to comment Specifically on the cadence for the Q3 and Q4 on sales that we're projecting.

Speaker 1

Yes, I think as you just take a look at What our expectation is in the 3rd Q4, it's pretty ratable between the two quarters. When you look at the anticipated volumes that We would anticipate to ship in each one of the quarters. So when you take a look at what we did in the first half and back into our overall guidance, I would anticipate shipments to be pretty equal in the 3rd Q4 of the year. Not really that unusual to what we experienced last year at This time as well. We were in a similar situation and that was a result last year and that's our expectation for this year as well.

Speaker 3

Great. Really appreciate the color there guys. And then maybe looking ahead, good job securing that additional tonnage You called out for 2024 to 26. As we look at 2024 and beyond, do you feel like this 36,000,000 Ton run rate for 2023 is still achievable over the next few years. I know there's obviously some puts and takes, but it would be great to get your thoughts on maybe potential EPA regulations Joe, you just talked about some of the demand that's coming online on the industrial side.

Speaker 3

How do you think those things affect your production And maybe even U. S. Coal production overall as we look ahead?

Speaker 2

So answer your first question, yes, we do believe the 36,000,000 Run rate is sustainable over the next several years. When we look at the negotiations that are yet to be determined in the back half. We've got probably over a half dozen customers that We believe we'll be in the market to fill out their book for 24 plus. Most of our Solicitations have been for a 3 year period and most of them are at similar tonnage. So We believe that with our customer base and their plans for the future, we do see the ability to maintain our $36,000,000 at a minimum.

Speaker 2

It could go higher depending on what we want to do in the export market. So we're targeting about 6,500,000 tons This year into the export market, it's possible that that number would go down if we are successful on some solicitations in the back half With the ability to flex back up to something over $36,000,000 depending on the export market next year and the following year. So Specifically to the EPA rules, EPA, they are out there in force trying to Accelerate this transition, we believe that essentially everything they're doing is in violation The major questions doctrine that was the result of the West Virginia versus EPA Decision last year by the Supreme Court. So there's a lot of legal activity going on to try to Prevent those rules from coming into effect. I think that with the demand Projections for electricity, there are several utilities that are Engaged in as well as NERC, Burt, the different RTOs trying to give warning signs To the administration that we need to maintain all of our fossil fuel fleet, that's both coal and natural gas.

Speaker 2

There's still pressure for some that believe that you can continue to close plants and Still grow electricity, I don't quite understand that as far as generation to meet the growing demand. So we feel good about the future and we feel good about the demand. Last week, just Elon Musk spoke at a Pacific Gas and Electric Summit. And he basically was saying that His biggest concern is there's insufficient urgency and people just don't understand how much electricity demand there will be. Basically, the headlines were tripling of electrical output.

Speaker 2

We believe the Same thing that Elon is saying. I don't know about the math, but we definitely are seeing in everything we're looking at That the demand predictions for electricity are pretty low, but our investor owned utilities To what we're hearing of opportunities to make investments in this transition area that's going to require quite a bit of electric load. And so And you still see the delay in getting replacements for coal plants. So we think it's going to be delayed Practically speaking and hopefully by policy, but President Biden continues to double down on his Beliefs, but I think in talking to the industry, there's some caution that's being raised And we're getting input from customers just saying that we need you to continue to maintain your production level For the next decade is what we're hearing now. We'll have to wait and see whether politics rules Over what the engineering officers are saying or engineering management saying.

Speaker 2

But we feel good about Our demand staying at current at this at the 36,000,000 tons and hopefully we can grow it a little bit.

Speaker 3

Very helpful, Joe. Thanks. And then maybe just finally, if I could ask one last question. You guys mentioned Your cash position, your liquidity is affording you the ability to look at multiple investments. Can you talk about some of those opportunities you guys are seeing in the marketplace currently?

Speaker 3

Maybe on the oil and gas side and the new venture side, any thought on timing or size would be great as well.

Speaker 2

So on the oil and gas side, we committed and everything is still continuing to be the same as what we've Indicated to you all before and that is we're reinvesting prior year's EBITDA into the oil and gas space. So through the Q2, we've invested around $76,000,000 And with our guidance that leaves probably $35,000,000 or so where we had $35,000,000 for the ground game is what we call it As opposed to competing in packages and we've completed around $4,000,000 of that In the first half and just in July, we closed $5,000,000 of investments. As we look to the balance of the year, so there's another $25,000,000 or so. We would We think there are opportunities out there. So I would expect that we will be able to complete those investments In our oil and gas segment, in our royalty segment, we continue to be positive On that segment for the long term, we continue to see oil demand in the world At record levels, we really just don't see that changing even with the conversion to electric vehicles.

Speaker 2

We think electric vehicles will grow. We're not in the belief that it's going to grow as fast as some believe, but With the refining on the world demand for oil, we believe that we'll continue to see great opportunities to invest Cash flow and get returns comparable to what we've been getting, which we find them to be attractive. With natural gas, with LNG terminals coming on, We think the demand is going to be growing there as well, which benefits not only Our royalty segment, but also should impact domestic pricing, which will benefit our coal operations. On the new venture side, Matrix is continuing to perform as we previously expected. We are also looking at several opportunities to invest In the New Ventures area, our primary focus right now are on Energy solutions issues, which basically get into batteries, storage and other aspects of the battery belt and opportunities that are presenting itself with the continued investments From Michigan down through Indiana, Kentucky, Ohio, Tennessee, etcetera, which is right in our service territory.

Speaker 2

I have nothing to talk to you about today. Hopefully by the next earnings call, we'll be able to give you better color On the opportunities that we're talking about there.

Speaker 3

Great. Really appreciate those comments, So, I'll leave it there guys. Best of luck in the second half.

Speaker 1

Thank you.

Operator

Our next question is from Mark Reichman with Noble Capital Markets. Please proceed.

Speaker 4

Good morning and thank you for taking my question.

Speaker 3

I was going to can you hear me?

Speaker 1

Yes. Yes, we can hear you.

Speaker 4

Okay, good. I had to dial in on my iPhone because we were having problems with the server On the other phone, so the question I have is looking at sales, I mean, it looks to me like even at the low end of your guidance, you're still going to have Modestly higher sales in the second half. For me, I think the wildcard is really the price. Illinois Basin pricing has been relatively steady, but the pricing in Appalachia fell considerably 2nd quarter versus the Q1, but your guidance suggests on a total basis that really you only shaved off a dollar at the top end. So Could you just maybe illuminate your expectations on pricing between the basins for the remainder of the year?

Speaker 2

So we're totally focused on the international markets. So there's really no Spot market, we don't anticipate there'll be any activity for 2023. And If you look at the one thermal mine we have basically in East Kentucky is really a premier product And it doesn't really trade off those indexes. We don't have that much to sell open to the market this year there anyway. So our reduction down really reflects the decrease in API2 in the export Pricing of the export market that we're planning to fill for balance of these sales.

Speaker 2

When you're looking at the pricing, that's on a delivered basis. So there's a lot of different moving parts back to transportation and logistics That can soften some of that as far as getting a good net back at the mine. So we estimated when we've got several conversations going on with our trading partners for those export volumes And we believe we've conservatively priced what we think those sales opportunities are going to be in the back half This year and we're confident that we can place those tons. So we feel really good about our guidance As long as we can continue to execute and demand stays consistent with where it is now and It's hard to see what catalyst would change that based on conversations we have. There's always Surprises, but right now we feel very good about our guidance.

Speaker 4

Okay. Well, I guess what I'm kind of getting at is it kind of implies An improvement in the 3rd and the 4th quarter in Appalachia pricing relative to the 2nd quarter, but maybe not as high as the first You would expect maybe a rebound in pricing in Appalachia assuming Illinois Basin remains relatively constant. I think right now I have Illinois Basin a little weaker in the second half, but just as the model stands now, I think I'm around 65 in the quarter on a Full year basis, but that like I said, that does imply the 3rd and the 4th quarter coal sales price per ton And Appalachia, quite a bit higher than the Q2. Is that kind of consistent with what you're thinking?

Speaker 1

Yes. Mark, I don't know what you mean by quite a bit higher, but I think as we look at the second half in Appalachia, We do anticipate it being slightly higher than where we were in the Q2. Generally speaking on The Appalachia side, as we look at the back half of the year, anywhere from 2% to 4% higher than where we were in the second quarter. Okay. It's kind of as we look at the pricing piece of it related to that particular area where our guidance kind of zeroes in on.

Speaker 2

Okay. No, that's Brett. And those are contracts too, Mark. So I mean it's not like we're looking at the market And projecting on the domestic side, because we're looking at the contract book and What is expected to be delivered on our contracts?

Speaker 4

Yes, it's pretty firm. It's pretty firm at this point. You've got good visibility there. And then the second question was just on that G and A. I mean, dollars 10,000,000 reduction, I mean, that's almost 10% of The full year previous guidance, I guess your new guidance would kind of track with the 1st and the second quarter expenditures.

Speaker 4

But Were there any expenditures that you just that you were expecting that you decided not to spend? Or what do you attribute to the to your lowering of your G and A expense Guidance.

Speaker 1

I think really when you get into G and A, it's just looking at what full year results And the impact that you have in terms of the full year results are anticipated and what that impact works back to on the G and A side.

Speaker 4

So kind of you adjusted it based on kind of your first half spending and that like I said that kind of tracks with the new full year guidance In terms of around $80,000,000 but okay, well that was I mean $10,000,000 was pretty significant relative to the previous guidance. And then just lastly, and I think this kind of goes to Nathan's question earlier, which I thought was a good one. You have very strong free cash flow, roughly what about $140,000,000 $139,000,000 very strong coverage on the dividend. So just basically kind of how are you kind of thinking about capital allocation? I know you took down some debt recently.

Speaker 4

So just kind of your overall view on do you think you'll get more active on the acquisition front or just how are you kind of thinking about Managing the cash flow that you're generating.

Speaker 2

Yes. So I think As we've indicated previously, we plan to sustain our distribution at the $0.70 a quarter. Secondly, we will Provide the capital necessary to maintain our coal operations plus the growth projects that we previously announced. So CapEx will be what is guided and maybe a little over, but Right. Within those ranges, maybe at the low end, I can't precisely tell us all timing.

Speaker 2

The commitments are pretty much there. Oil and gas we talked to and so the balance then gets the debt pay down, which Kerry mentioned it is fully In his prepared remarks that we will look to continue to pay off those senior notes. And then we've got these investment opportunities primarily in the new venture space that we're looking at. And if you go back to a year ago, I talked In terms of 2 different ways we could look at investments. One was to how we would think about just good investments that would give visibility into various areas that we could determine how to make investments in those assets that could actually be Long term cash flow vehicles and that 5th vertical was in those type of asset investments.

Speaker 2

I think we sort of matured based off of the 2 years With an investment philosophy, I think we've zeroed in with the experience we've had to focus on some businesses Yes, we still may invest in a minority position in some growth businesses, but when we do that, It's definitely going to be in conjunction with the opportunity to invest More alongside those particular businesses or those types of industries where we can in fact start building businesses for the long term. And we're again focused in the battery area. We just think that with the increased demand In electricity, that battery storage both for the electrical sector As well as the industrial sector is going to be an area of huge demand. So We're focused on that area and seeing how we can participate in that. The investment Sizes we typically made are anywhere from $25,000,000 to $50,000,000 Per investment to make it sizable enough that we see opportunity to Make a good return and have those strategic relationships, but not so much That we're ending up focusing on 1 or 2 investments, but we'll have the opportunity to have several, so that We've got opportunities to be able to grow our company over the next 5 to 10 years.

Speaker 2

So we're As I mentioned in my prepared comments, we're encouraged by what we're seeing. And I think and hope Hopefully by the next earnings call we'll be able to give you more specifics on specific investments That hopefully will be successful in making some commitments by that timeframe, but we're not in position to talk about those right now.

Speaker 4

Well, that's very helpful. I really do appreciate it. Thank you so much.

Speaker 2

The other thing I would just say to that, we're looking we're hoping to find some opportunities Invest in businesses that will allow us to bring on more debt capacity as well. So these would be cash flow generating type businesses so That it would allow for additional debt capacity additions as we look into 2024.

Operator

Our next question is from Dave Storms with Stonegate Capital Market. Please proceed.

Speaker 2

Good morning. Good morning, Dan.

Speaker 5

Just want to start you mentioned in your prepared remarks on Some cost savings measures that you've started. Just wondering if you could give us a little more color on what that looks like?

Speaker 2

Everything goes back to efficiency. That's the main evaluation trying to determine We're the most efficient mine plan is. Obviously, everything needs to try to Staff ourselves to be able to operate at full capacity for what we've got invested by cutting back some of that production. We have to decide how we do allocate that, but our guys are focused on that. I think supply chain It's an area that last year we were needing to buy more supply Then we actually needed just to ensure that we had materials and supplies.

Speaker 2

I think that has allowed us to with the years Over the last year, the supply chain has improved. So that's allowed for some small Reduction in expenses, but it really just gets back to productivity. In large part what we're seeing in the Q2 was just the productivity at Tunnel Ridge by not having Longwall moves. So productivity is the key to cost in most cases and It's definitely true for us.

Speaker 5

Very helpful. And you just kind of touched on it With staffing at full capacity, it sounds like you're reallocating some of your shifts. Is there any threat of losing labor, especially in this tight labor market As you move people around?

Speaker 2

We have had a little transit or a little bit of Some people that have left, but no, we're trying to maintain our headcount and so far we've been able to do that. And again, that's why we're repositioning to some areas that may not be as productive in the short term, That will allow us to be more productive once we get through a couple of these construction projects. We got the one at Riverview And the extended longwall move at Metiqui is another example where we're moving into a new area And the newest the new area that we're moving into have longer panels. So our development has been Yes. Needing to catch up with the length of the panels that we're moving to.

Speaker 2

And we could have designed that differently, but given where the We felt like this was a great opportunity just to go ahead and go for the longer panels. So that will reduce our production in the short term, But positioning ourselves for next year should give us a lower cost Future there than what we would otherwise have with a shorter panel. So, but from a headcount basis, we're maintaining our headcount, But it is targeted more to the 36,000,000 ton production level compared to when we started the year we were targeting 38,000,000 Last quarter we went to 37, now we're 36. So we're Yes, labor is still tight, but we're able to maintain at this level and the attrition has slowed down Over the last 3 months or so to where we can we feel like we can maintain this level.

Speaker 5

That's great color. Thank you. One more if I could. Just any comments you have around the new customer acquisition environment Given that coal prices are starting to stabilize a little bit, inflation started to moderate, is any of that helping you drive new customer acquisitions?

Speaker 2

I wouldn't say new customer acquisitions. I mean we've been in this business quite a while. So we Sell to most of those that want to be around for the next 15 years, which is what we've targeted. We have We had some conversations where we're hopeful that we could pick up some market share, but Yes. We'll have more to know as we go through these solicitations whether that happens or not.

Speaker 2

But As I mentioned earlier, we're very confident that we will be able to maintain at this level if not grow our Domestic book beyond the $36,000,000 beyond $30,000,000 and it allows us to stay at the $36,000,000 in the net Then we'll have to decide whether we want to pull back the international side or try to grow production a little bit. But right now I'd say domestically we're targeted on the $30,000,000 a year Run rate for the next 5 years or so and hope that we can sustain that and believe we can.

Speaker 5

Understood. Thank you very much.

Operator

Our next question is from David Marsh with Singular Research. Please proceed.

Speaker 6

Hi, good morning. Thanks guys for taking the question. Just wanted to touch on the notes real quickly. Are they continuously callable at this point at par? And what are your what are the parameters around calling those in?

Speaker 6

Is it 30 days notice?

Speaker 1

Yes. To answer your question on that, David, yes, they are callable at par anytime. And like you said, it's just a 30 day Generally a 30 day notice period that we are required to provide in order to call those.

Speaker 6

Got it. And so obviously interest expense was down a good bit in the quarter, I In part due to the partial call, should we expect that to continue to Fine, as you continue to work those off and can you kind of put some maybe put some brackets around that in terms of how Quickly that continues to come down?

Speaker 1

I think as it relates to the senior notes, the Current expectation, we'll continue to call those, as I mentioned in my prepared remarks, on a consistent basis. The current Our process right now is to do something similar to what we have been doing here in the most recent quarter. That's obviously up for conversation each time that we make that decision to call, but I think A consistent quarterly call would be a good assumption to make.

Speaker 6

Okay. Yes, that's really helpful. And that's a prudent use Cash flow, right? Definitely think in this environment, it's awfully tough to consider refinancing them. So Just shifting gears a little bit, one thing I noticed is that On the oil and gas side, your POE sold has really grown really Nicely, very nicely year over year.

Speaker 6

I mean, it's up 50% year over year. So clearly, these investments that you guys have been making are paying dividends. And Obviously, oil is starting to climb back up a little bit, up into the 80s here. I know that the mix For you guys is a little bit gassy, but could you just talk about directionally How does that change the game for you guys in terms of evaluating Acquisition opportunities as well, just as oil continues to creep back up and what do we need to see on the nat gas side for you guys to get Kind of better price realizations maybe closer to the back half of last year type levels.

Speaker 2

I think on the right now the guidance we've given in this release Did not factor in the most recent uptick in oil prices. I think that as we look at Acquisitions, we continue to be focused in the Permian. And As we think about the Delaware is a little bit more gassy, but Yes. I think most of our acquisitions most recently have been more oil based. We still have our Mid composition, but we're still bullish on gas too.

Speaker 2

But I think our focus on the Royalty side will continue to be consistent with what we've been doing and really target the Permian primarily, but we'll look at all basins And all opportunities. So I think that we have not changed our underwriting standards And we are seeing some good deal flow, so both for small and direct investments And there's still some packages out there that we'll continue to evaluate.

Speaker 6

Got it. Thank you guys very much for the color. Appreciate it. And I'll yield to the next caller.

Operator

Our next question is from Arthur Kavarotino with ANC Capital. Please proceed.

Speaker 7

Hey, guys. Good morning. Thanks for taking my question. Just a couple of things. On the financing question, Kerry, are there any minimum bite sizes when you guys call the senior notes that expect us?

Speaker 1

No. There's no minimum bite sizes. It's really up to us whenever we call them to designate what amount That we are calling. They're callable on a pro rata basis. So whatever amount we designate, it's pro rata basis back out to The holders of those notes, but if we wanted to do $10,000,000 we could do that.

Speaker 1

We just opted to do $50,000,000 in this last

Speaker 7

And it probably depends on how you're feeling where the cash is going to be at the end of the month or the quarter or whatever, right? How you decide this? It seems like you're matching it with your cash flows like The way I look at it, or I mean would that That's

Speaker 2

right. Yes, that's correct. And future opportunities for cash flow.

Speaker 7

Got it. All right. And then the second thing away from the finance question is, I got the Elon Musk thing this morning on the PG and E conference. And The question was when you're talking about electric demand. A few weeks ago, like the auto sales were like 3 point no, I'm sorry, 7% like were electric cars.

Speaker 7

And I'm starting to think like at what point do we get with the electric cars in this country where we can almost point out this is how much BTU, how much coal demand is feeding the fleet? I mean, it seems it's kind of early, but it's But I was shocked at that 7% number for new car sales. Any color on that you could shed where we go? Because it's almost displacement, right? We're displacing Unleaded gasoline with coal to power transportation, but it's early days, but any color on that would be great.

Speaker 2

Yes. So with the EV space, I mean the big issue that most that Yes, like 2 or 3 different factors. 1 is just the cost of the EV. And what we have seen is most of the OEMs have reduced their pricing By $10,000 per vehicle or so to try to stimulate the demand and really try to get market share You're starting to see many more models come out. The second factor gets into The they call it range anxiety.

Speaker 2

And so there's been a couple of announcements that have come out since Last call 1 is with Tesla where they're going to open their network and have partnered with GM and Ford I believe. And that's going to roll out over the next 2 years. So that's not immediate, but it's going to roll out over 'twenty four, 'twenty five and be Fully operational, I think by 26. Then you've seen another announcement by numerous of the Other manufacturers from the European manufacturers primarily coming together and talking about building out their own network. On top of the $5,000,000,000 NEVI program that the government's put in place And we're starting to see finally the states starting to go out and bid for those projects.

Speaker 2

So I would say over the next year and a half to 2 years, you're going to see a pretty robust Network charging stations on the highways that should give customers A safe feeling on the ability to have range anxiety eliminated to where it would support The purchases of more EVs. I think the commitment not only by the OEMs, but all these Governors around the battery belt to build these out. The third factor I didn't mention is back to the Tax credit, the $7,500 tax credit per vehicle, which also then requires a certain percentage of The auto to be manufactured in America and or the battery materials being Sourced or manufacturer or some type of assembly in America and that's An area that is constantly being discussed. I think that this administration has When they've adopted regulations, expand that opportunity to make sure the $7,500 credits are available. And so The price point seems to be competitive with the combustion engine.

Speaker 2

How fast that goes is anybody's guess. But I think When we look at our New Ventures area and we look at investments in the battery space, all these manufacturing facilities are talking about At least 50 megawatts, sometimes 2 50 megawatts, somewhere in between for every manufacturing And that's a significant load compared to historic when Business Economic Development officers are out looking for projects to move to states. In the past, 5,000 megawatts would be high, much less 50 to 100 to 200. So we're looking at major sinks and not only Are they large loads, but they want to be continuous. They do not want to have interruptible rates.

Speaker 2

And we're starting to see Capacity concerns and that's why you hear FERC and all these guys saying we better pay attention to the speed of this transition because you can't continue To close plants and build plants and add no new capacity. So I think that Demand for electricity has definitely gone up. I think as I said earlier, it seems to be Underappreciated at what that speed is going to be. And back to your question of when can we actually See that and see that roll through. I think it will be within the next 2 years.

Speaker 2

In my Conversations when I go out and speak to people, I've been saying to everybody just think about how many people have a graduation in their family this year, Whether it's college or high school or kindergarten or whatever and just say How fast did that 4 years go by? It goes by in a flash. So we as public policymakers and investors, We have to recognize we're making decisions right now that are going to determine the answer to your question. And so we don't At time just to delay and just think business as usual, we have to really gear up in anticipation of this significant growth in electricity demand. And therefore, it's time for policymakers to come to the table and realize that if we're going to have reliable low cost energy, We can't do business as usual.

Speaker 2

We have to factor in this demand growth and that's why I have confidence that they're going to Start thinking in terms of deferring some of these closures because if we're going to meet that demand, You have to have electricity, it's bottom line. Biden wants to electrify America, he's got to have electricity to do it. Yes. And we all know that the renewables are just there you cannot look at a renewable installation That's adding capacity because we still don't have battery storage to a level that is dependable. So you really haven't looked at baseload plants And those are fossil plants in your nuclear fleet.

Speaker 2

So it's hard to answer your question precisely, but directionally I would say within 2 years you'll have a better idea Exactly what that demand load is for I'm focused on the Eastern United States. So for the areas where we market, I think we'll have a very good idea about 2025 exactly what that demand load needs to be and And therefore, what capacity we have to have to provide for reliable energy.

Speaker 7

Yes. And it's interesting, a couple of weeks ago, Barron's had a cover story and Siemens, the big German equivalent of GE, having enormous problems optimizing Wind power, windmills, and these are great engineers. So the wind may fall far short of what's like what's boilerplate on a windmill to deliver electrons. So just this seems like it's happening in slow motion when we find out. So all right.

Speaker 7

And then on the Permian, There's a large royalty company, Public One. I don't know they're having a proxy fight, whatever, right? So I don't know if they're getting delayed in buying stuff. Are there more opportunities than normal for these oil and gas royalties in the Permian because it seems like there's some dysfunction in some of M and A going on?

Speaker 2

I would not say there's any more than normal.

Speaker 3

Okay.

Speaker 2

So going starting last year As you saw some of the price decline, it got sticky. Nobody was wanting to sell at those prices, but then after Yes. You start adjusting to what might be the new normal. So there's adequate deal flow for us To maintain our policy to think in terms of investing $100,000,000 a year. That's the way I would look at it from our lens and our perspective Without modifying our underwriting standards, so as one of the earlier callers said, I mean, our returns have been Very good.

Speaker 2

We've been able to hit our targets as we think about the investments we've made. And I think our guys have done a very good job of trying to assess the pace of drilling. And you can read a lot of stuff, but I think in the Permian, they're going to continue producing at the same level for Several years to come. So as a royalty owner, we feel like it's a great investment for us To be complementary for our cash flow purposes as we look to where we want to be in 2,030.

Speaker 7

And you're the right size. You're not like an Exxon where you're like too big where it doesn't make a difference. You're and you're not too small. You got a good size then, right? I mean, going in there,

Speaker 3

right? Yes, sir.

Speaker 2

Yes. Yes.

Speaker 7

Okay, great. Thank you very much for taking my questions. Thank you.

Speaker 4

Thank you.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to Cary for closing comments.

Speaker 1

Thank you, operator. And to everyone on the call, we appreciate your time this morning as well and also your continued support and interest in Alliance. Our next call to discuss our Q3 2023 financial and operating results is currently expected to occur in late October We hope everyone will join us again at that time. This concludes our call for the day. Thank you.

Operator

Thank you. You may disconnect your lines at this time and thank you for your

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Earnings Conference Call
Alliance Resource Partners Q2 2023
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