News Of CALPERS Potentially Divesting Its Coal Assets Overdone
On December 15, news outlets announced that a California state senator might propose a bill in January that would require the California Public Employees' Retirement System to divest of its holdings in companies that produce coal. This headline-grabbing news sent coal stocks and ARLP partners down significantly. However, Peter Epstein thinks that the reaction was possibly overdone.
On December 15, news outlets announced that a California state senator might propose a bill in January that would require the California Public Employees' Retirement System (CALPERS) to divest of its holdings in companies that produce coal. According to a Bloomberg article, CALPERS has $5.2 million worth of coal master limited partnership Alliance Resource Partners (NASDAQ:ARLP). At the current unit price of ARLP, the average trading volume would cover CALPERS' $5.2-million holding in a single day. More likely, CALPERS would dispose of those shares over the course of a week or two. This headline-grabbing news sent coal stocks and ARLP partners down significantly on December 15. However, I think that the reaction on ARLP was possibly overdone. ARLP in a league of its own ARLP is a coal producer in the Illinois and Northern Appalachian coal basins. ARLP is unique in three very important ways. First, it is largely contracted and has priced its coal requirements for 2015 and even for a high proportion of 2016. Second, the company is located in the two best coal basins in the country. Third, it has a strong balance sheet and industry-leading margins. ARLP has a very strong record of performance, which has enabled it to increase its unit distribution each and every quarter for the past 10 years. Recently, ARLP reiterated its performance guidance for 2014. This performance, if achieved, would be a very solid result, especially vs. peers such as Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI), Walter Energy (NYSE:WLT) and Alpha Natural Resources (NYSE:ANR). ARLP carries a debt load of about $1 billion on top of a market cap of $3 billion. Peers are much more debt challenged. For example, Walter is weighed down by $3.2 billion on top of a market cap of just $115 million. That's why some of Walter's unsecured bonds are trading at 25 to 35 cents on the dollar. That implies zero recovery for stock holders.