Natural Resource Partners LP (NRP) continues to make good progress diversifying away from leasing its owned coal reserves in central Appalachia and the Illinois Basin. And that’s a good thing because the Company’s coal business has been under significant pressure. The reason for my update on this company is that Natural Resource Partners LP (NRP) recently presented at an industry conference. Please see the corporate slide show and listen to the presentation by .
Diversification really kicking in
Of the remaining 75% of revenues which are coal-related, 55% comes from what I consider to be higher quality coal-related sources. For example, 26% of total revenues came from leasing coking coal reserves. The biggest customers in this segment are Alpha Natural Resources, Inc. (NYSE:ANR), and Cliffs Natural Resources Inc (NYSE:CLF). Neither of these producers is doing well at the moment, but both have more than adequate liquidity to survive the coal market downturn.
Alpha Natural Resources, Inc. (NYSE:ANR) is saddled with debt from the ill-timed acquisition of troubled Massey Energy in 2011. Since that time, Alpha has written down a lot of the legacy Massey mines. However, Alpha has spent the last two years cutting costs and streamlining operations. When the coal market recovers, Alpha will be there to benefit and Natural Resource Partners LP (NRP) will benefit from Alpha’s rebound.
Cliffs Natural Resources Inc (NYSE:CLF) is largely an iron ore producer with operations in the U.S., Canada and Asia. One-eighth of the Company’s production, about 6.5 million tons, came from coal in 2012. Importantly, Cliffs is committed to growing its coal business to balance out its heavy exposure to iron ore.
Natural Resource Partners LP (NRP) has been distributing a steady $0.55 per quarter for the past few years, giving it a 9.5% current yield. The unit price has been stuck in the low $20’s all year while other MLPs have moved higher with the overall stock market. By comparison, Natural Resource Partners LP (NRP) is quite cheap, yielding almost twice the average MLP. What is the average MLP?
Energy MLPs are typically tied to oil & gas pipelines, storage facilities, ports and rail, i.e. infrastructure projects. Natural Resource Partners LP (NRP) is one of only a few largely coal-related MLPs. The other coal MLP that I like is Alliance Resource Partners, L.P. (NASDAQ:ARLP). Unlike Natural Resource Partners, Alliance Resource Partners, L.P. (NASDAQ:ARLP) is a coal producer. By sticking to its knitting and avoiding the urge to merge that sunk a number of coal producers in 2011, Alliance is now the best of the bunch in terms of production growth and margins.
Natural Resource Partners’s revenue guidance for 2013 is about $360 million, which would be down nearly 5% from 2012. While disappointing, a 5% decline in revenues would be modest given the dramatic decline in the coal markets. Natural Resource Partners’s ability to withstand the coal market storm is a testament to its diversification strategy.
Why Should One Invest In a MLP with Zero Distribution Growth?
Although Natural Resource Partners is not increasing its annual distribution, and probably won’t increase it for at least another year, the Company’s 9.5% yield is hard to beat. Compare that to today’s 5-yr Treasury bond yielding less than 1%. High yielding utility, healthcare and telecom stocks are yielding 3%-5%.
Yield Today, Growth Tomorrow
Even if Natural Resource Partners does not increase its distribution for the next two years, I would argue it’s still a good investment. The Company has well over $100 million of cash on the balance sheet, enough to fully cover 2 quarters of distributions. The risk of a distribution cut is quite low.
Conclusion
As Natural Resource Partners emerges from the coal market swoon alive and well, I think the distribution yield that investors require could fall to 7%-8%. At 7.5%, on a flat $2.20 annual distribution, that would equate to a unit price of $29.33 and a total return of 25% over a 1-yr time horizon. In a year or two, if Natural Resource Partners starts increasing its distribution again, the unit price could rise well into the $30’s. This is an investment that could easily return 20% + for two years in a row.
The article Natural Resource Partners’ Safe, Strong 9.5% Yield originally appeared on Fool.com.
Peter Epstein owns shares of Alpha Natural Resources, Alliance Resource Partners, L.P., and Natural Resource Partners LP. The Motley Fool recommends Alliance Resource Partners, L.P.. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
