High-yield alliance resource partners, l.p. could thrive if this forecast is right — the motley fool gas national average 2008


That caveat in mind, here’s what the EIA is projecting for coal’s future today: Demand continues to dip through the early 2020’s and then essentially flatlines for 25 years. The trend of falling demand is driven by the shift toward cleaner energy sources (like renewables) and competition from relatively cheap natural gas. Essentially, utilities are shutting the least efficient and dirtiest plants in the their fleet. That’s expected to pick up over the next couple of years, with 25 gigawatts of coal-fired electric capacity set to be retired between 2018 and 2020.

However, after those coal power plants are shut down, the EIA’s base case expects plant closures to fall off and utilization at the remaining plants to increase and offset the demand drop from closing plants. Utilization is projected to increase from 56% in 2017 to 70% by 2030. Essentially, there will be fewer coal power plants but they will be run much more efficiently. How Alliance wins in this scenario

Frankly, this isn’t a great forecast for coal miners when you look at the big picture. However, there are some important fine details that need to be reviewed. For example, the falloff in coal demand has largely been hitting the Western and Appalachian coal regions. That’s set to continue into 2020, but at a less severe rate. The relatively small Interior coal region, on the other hand, has actually seen demand head slowly, but steadily higher. The EIA expects that trend to continue because of the nature of the region’s coal quality and logistical advantages.

This is where Alliance comes in. The coal miner’s main focus is on the Illinois Coal basin, which is in the Interior region. That’s why the miner was able to increase production for years while peers like Cloud Peak Energy, which operates in the Powder River Basin in the Western region, were curtailing production. That trend lasted until 2015, with 2016 production falling off for Alliance. However, 2017 saw production pick up again, partly thanks to an uptick in exported coal. And the partnership is currently looking for coal production to rise nearly 8% in 2018.

If the EIA is right about the interior region, even though coal demand may continue to fall overall for a few more years, Alliance’s well-situated mines should do relatively well. The current trend toward higher production at Alliance largely backs the EIA’s forecast on that front. And once coal demand stabilizes overall, after plant closures slow and utilization at remaining plants pick up, demand for Alliance’s coal should hold steady for decades. Clearly, coal prices will be the ultimate determinant of Alliance’s top- and bottom-line success, but stable demand will go a long way toward supporting stable prices.

In fact, even if the EIA is wrong and coal demand continues to fall overall, history suggests that the pain will be largely felt in the Western and Appalachian regions, not the Central region in which Alliance is focused. In fact, even in the EIA’s downside for coal scenario, the dotted lines in the EIA graph above, the Interior Region remains the standout performer. That’s a function of the unique attributes of the Illinois basin and its coal, which indicate that it will likely remain in high demand even as other power sources, like natural gas and renewables, continue to gain share on the grid. In other words, Alliance is well positioned even if coal’s pain is worse then currently expected.