Wednesday, March 20, 2013

Alliance Resources vs Patriot Coal


Alliance Resources (a minor obsession of mine) is financially the best performed coal company in America. The stock is near all time records - and distributions are large and unimpaired.

Patriot Coal is in a spectacular bankruptcy.

I thought it reasonable to compare the best of the best with the worst of the worst - just to see how different they really were - perhaps so I could pin down what made Alliance Resources special.

Here the companies are compared by tons, employees and tons per employee.


Patriot CoalAlliance Resources

tons (millions)Employeestons/ employeestons (millions)Employeestons/ employees
200722.12300960924.326009346
200828.54300662826.429558934
200932.83500937125.830908350
201030.93700835128.935588123
201131.14300723330.838328038
201224.94100607335.243458101







2007-11145.4181008033136.2160358494
2007-12170.3222007671171.4203808410



Alliance is better - it is smoother for instance - which means less hiring and firing. And it does not have the crash in productivity at the end - but that crash happened after the bankruptcy.

But it is not massively different.

It probably makes sense to use the balance sheet data from 2011 (before multiple restatements) rather than 2012 to examine Patriot because that was before the bankruptcy mucked everything up. In those days Patriot was still humming along (admittedly in some distress).

Patriot had considerably less machinery but more "buildings and improvements" than Alliance. That figures - some of Patriot's operations were open-cut whereas Alliance is entirely an underground miner. Open-cut mining involves lots of "improvements" (although some would argue removing hills does not constituted improvement.)

Patriot produced far better coal. Some of their coal was metallurgical - and most was lower sulfur. This coal should get a massive premium price - so that is one in favor of Patriot.

Patriot had in 2011 way less debt than Alliance has now. This is kind of amazing - you can go spectacularly bankrupt with an operation this size and this level of productivity.

The main difference is in the size of other balance sheet liabilities. Patriot had $238 million in workers compensation obligations (2011) versus Alliance having only $68 million (2012). Even more pronounced is the post-retirement obligations where Patriot had $1387 million (2011) versus Alliance at  a mere $31 million. Alliance might say that this was the benefit of a non-unionized workforce but if that is the case then union concessions would be enough to revive Patriot (and that does not look likely).

There is quite a deal that is strange and unusual about this story.



John

9 comments:

David Merkel said...

Dear John,

Have a look at HNRG. I have no position in it, but it is the only semi-significant coal company with little debt in the US.

Kid Ing said...

A miner obsession indeed!
Coal me simple but is this story really more complicated than potential 1) allocating expense to capital expenses and therefore reporting solid EBITDA (2) paying for dividends out of debt issuance (3) weird inter-company transactions?

John Hempton said...

Kid LNG - are you alleging a WorldCom style capitalization fraud?

Couldn't possibly be the case.

Send me an email though.

John

Anonymous said...

Peabody Energy hived off all it's unionized mines into a new entity called Patriot Coal. It was basically a maneuver to rid Peabody of most of its worker's obligations, however irksome it must have been to give up good mines in the process. So what's a good Patriot to do with all these obligations? Well, declare bankruptcy and hope the judge allows them to reduce or even eliminate the obligations.

Keeper said...

BTU spun off PCX a couple of years ago wtih lots of retirement obligations, hence the reason for the large number in PCX-s case. Recently actually PCX sued BTU regarding this. From a recent article: "The miners protested against what they call a “scheme by executives of Peabody, Arch Coal and Patriot Coal to create Patriot as a subsidiary that was designed to fail, in order to avoid payment of health care obligations to retired miners and surviving spouses.”". So its not suprising to see such big differences in those numbers. To be honest I am not convinced so far about going short ARLP.


Peter said...

Enjoying your analysis, but I would be careful with using the words "better" to describe CAPP coal.

A few unique issues with the US coal market:

(1) met coal has had a few (very) bad years with a lot of it being sold as "crossover" coal into the much lower priced thermal market;

(2) new regulations have forced pretty much every operating coal plant to install scrubbers -- there has been a real shift back to "dirtier" coal with better heat rates and away from the cleaner PRB coal which is a large part of why the Illinois River Basin coal (where Alliance has operations) has been seeing improved demand recently... better fully loaded costs than CAPP (high extraction/transportation) or PRB (high transportation)

Anonymous said...

I think you should give up your fruitless attacks on MLPs and concentrate on something you understand.

Tim said...

Couple things from this and earlier posts:
1. Re: coal quality and worker productivity - I think it relates to growth in ILB vs. CAPP region. ILB has lower quality coal, but its in demand. ILB also has more longwalls, which are more employee intensive.
2. The increase in maintenance capex per ton relative to opex per ton stretches the bounds of credibility.
3. I always thought distributable cash flow (DCF) was the metric MLP investors watched, but ARLP touted its EBITDA in the headline of its 4Q results, so it clearly is a key account worth 'gaming.'
4. The DCF they report in their press releases uses an "estimated" maintenance capex number that was $90 million below the number in the 10K. Actual DCF available to LPs was a lot closer to the amount they distributed than it initially appears. Not good for investors lookign for distribution growth.
5. Keep up the great work!

Tim said...

From the 4Q11 CC: "ARLP also has a number of significant maintenance projects scheduled for 2012 including transitions into new reserve areas at Dotiki, MC Mining and Mountain View, and completion of a new coal preparation plant currently under construction at our Dotiki mining complex..."

...So one of the big reasons maintenance capex was supposed to be up in 2012 was mine development costs, but capitalized mine development costs declined declined $41.2 million to $32.6mn?? Doesn't seem right.

Also, quickly looking at the 09 vs. 12 10K, it seems that while their machines appear to be increasingly brittle, managements assumptions about their useful lives seem to be getting increasingly more optimistic. Not that anyone looks below EBITDA anymore, anyways...

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.