Natural Resource Partners LP (NYSE:NRP) a Master Limited Partnership, or “MLP,” continues to make strong progress diversifying from the leasing of its owned coal reserves. Natural Resource Partners recently presented at an industry conference. Please see the latest corporate slideshow here.
In 2005, 54% of total revenues came from steam coal royalties in central Appalachia. Pro forma for the company’s February acquisition of a 49% interest in OCI Wyoming, a soda ash operation, only 20% of revenues come from central Appalachian steam coal. Key to the story is that 25% of total revenues now come from non-coal related sources, and that percentage continues to grow.
Diversification Strategy’s Next Step – Oil & Gas Properties in the Bakken
On June 17, the company announced the purchase of “non-operated working interests in producing oil and gas properties located in the Bakken/Three Forks play, located in the Williston Basin of North Dakota and Montana from Abraxas Petroleum Corp. (NASDAQ:AXAS) for approximately $35.3 million in cash.“
Historical financials for this asset were not included in the press release, but the acquisition is expected to be “immediately accretive to NRP’s unitholders.” Based on flat to declining revenues in some, (not all) coal-related segments, a third of total revenues could be coming from non-coal related sources by year-end. This is important because non-coal revenues should command a higher valuation.
What About Other MLPs?
While other MLPs offer attractive distribution yields, few have current yields of 9.8% or above. Of those that do, many have distribution rates that are less safe than that of Natural Resource Partners LP (NYSE:NRP).
One other attractive MLP is Alliance Resource Partners, L.P. (NASDAQ:ARLP). Alliance is simply the best coal producer in the US: best growth, best margins and operation from the best coal basins in the country. Alliance’s distribution yield is about 6.5%, but its distribution rate is increasing at 8%-10% per year.
CONSOL Energy Inc. (NYSE:CNX) and Cloud Peak Energy Inc. (NYSE:CLD) are the only other coal producers who might be considered in the same class as Alliance, but neither has a yield greater than 2%. Consol Energy’s business is currently being weighed down by its natural gas segment. Cloud Peak is 100% exposed to the Powder River Basin, not the place to be at the moment.
Back to Natural Resource Partners…
Natural Resource Partners LP (NYSE:NRP) has been distributing a steady $0.55 per quarter, giving it a 9.8% current yield. The unit price has been stuck in the low $20’s while other MLPs have moved higher with the overall market. By comparison, Natural Resource Partners is now yielding almost twice the average of other MLPs.
Yield Today, Distribution Growth Tomorrow
Even if Natural Resource Partners LP (NYSE:NRP) does not increase its distribution for the next two years, it’s still an attractive investment. The company has over $100 million of cash on the balance sheet, enough to cover two quarters of distributions. The risk of a distribution cut is extremely low. An increase in the company’s distribution rate is unlikely this year, but Natural Resource Partners LP (NYSE:NRP) expects to reignite distribution growth as soon as prudently possible.
Conclusion
If next year a third of revenues comes from diversified sources and the remainder from coal-related sources, the distribution yield investors demand should decline. If one ascribes a typical MLP yield of 6% on the company’s non-coal related revenues and a 9% yield on the rest, that implies an 8% overall yield. At 8% on a flat $2.20 annual distribution, that suggests a unit price of $27.5 and a total return of 32% over a 1-year time horizon.
Peter Epstein owns units of Alliance Resource Partners, L.P., and Natural Resource Partners LP (NYSE:NRP). The Motley Fool recommends Alliance Resource Partners, L.P..
The article Natural Resource Partners Moves Into Bakken originally appeared on Fool.com.
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