Why Alliance Resource, Cloud Peak Soar as Coal Sector Crashes

Tickers in this article: ARLP BTU CLD

NEW YORK (TheStreet) -- Coal stocks have been hard hit by the threat of environmental regulations and the rise of natural gas as a cheap and plentiful alternative to coal. But not all coal stocks have suffered the same fate.

From June 2009, the Dow Jones U.S. Coal Index has fallen 41%, with any gain from the past five years and then some completely wiped out. The high of 496.71 on April 1, 2011, sounds like a bad joke, now with the index at 145.17. The largest coal company in the world, Peabody Energy , is down 53% over five years to $16.79, plummeting from a high of $72.71 on April 1, 2011.

On the other hand, Alliance Resource Partners is up 128% and Cloud Peak Energy is up 29.2% over the same time period. Both stocks benefit from boring, stable businesses and the changed regulatory landscape, and neither shows any immediate sign for concern. But as the future holds even more regulatory pressure on the commodity, that rosy outlook could change quickly.

ARLP Closed Friday at $87.36. The stock is scheduled for a 2-for-1 split after the close of trading Monday, June 16. CLD was up 1.4% on Friday to $19.22.

Alliance Resource is a master limited partnership, making it a special case within any basket of coal stocks. MLPs were given special tax status by Congress in the 1980s in order to boost the country's movement toward energy independence. They have few or no employees, and are not subject to corporate tax.

For investors, these tend to be defensive investments, focused on infrastructure and real estate businesses less exposed to risk and able to provide a stable source of revenue. While stocks pay a dividend, MLPs mete out a cash distribution that is treated as a return of capital and isn't taxable until the investor sells his stake in the company.

That's the biggest advantage of MLPs. Investors, known as unitholders, don't have to pay taxes on the cash distribution until they decide to sell their shares. Alliance Resource's yield currently is 5.58%, but that's misleading. While MLPs are designed to be stable workhorses, some, like Alliance, are growing, meaning the yield increases each year. In Alliance Resource's case, the total cash distribution increased 14% year over year in 2012 and 8.8% in 2013.

In a May report on ARLP, analyst Jorge Beristain of Deutsche Bank said he recommended Alliance as a defensive coal stock, but added the company's future prospects were tied to its expansion, particularly at the new Gibson South mine, and that the results of that expansion already were priced in. As a caution against his overall positive outlook for the stock, Beristain added: