The U.S. thermal coal market is starting to show signs of life according to Rhino Resource Partners (NYSE: RNO ) . That's great news because Rhino has a new mine set to open this year and, because of a natural gas asset sale, is now debt free. The company likes the position it's in.
A tough and changing market
Rhino Resource Partners' coal revenues fell 24% year over year in the first quarter. That came from a mixture of lower tons sold (down about 16%) and lower revenue per ton (off around 10%). Clearly, the coal market wasn't kind to Rhino in the first stanza of 2014.
That said, Rhino sold a natural gas investment for $184 million. That sale pushed the top and bottom lines higher in the first quarter, but will obviously do little to help results in the final three quarters. However, that deal leaves Rhino largely debt free. That's an enviable position to be in when other industry participants are selling assets to raise cash in an attempt to ensure they make it through to the other side of this coal downturn.
Fortunately, at least on the domestic thermal side of the equation, "the other side" appears to be in sight. According to industry watcher Platts, thermal coal from the Powder River Basin is seeing strong pricing this year. That's the beginning of a positive trend.
What's the fuss?
The reason for the price increase is that, according to David Khani, CFO of fellow coal player CONSOL Energy (NYSE: CNX ) , "we have these very low inventories in the gas markets and the coal markets... And we don't see any quick fix to rebuilding the coal or gas inventories." In fact, Khani says there's a catch 22 going on, because replenishing gas inventory will require more coal burn and replenishing coal inventories will require more gas burn.
No wonder CONSOL is so upbeat! The company has a fast-growing natural gas business, year over year production increased 23% in the first quarter, and a low-cost coal operation with a new mine coming online. CONSOL, which earned $0.50 a share in the first quarter, is ready to serve both sides of this dilemma.
Although Rhino just exited the natural gas business, it's at least ready on the coal side. Better yet, Rhino CEO Christopher Walton is saying the same thing as CONSOL. If it were just one of them then you could dismiss it, but the more industry players that see a turn the more you have to consider that now is the time to start watching.
A beast ready to charge?
While Rhino's Walton noted the low gas inventories and the low coal inventories, he went a little further: "we believe utilities are acting as if coal will be available to displace reduced natural gas burn. The question is, at what price?" That's a big question because coal miners have been shutting production to deal with low prices and reduced demand. You can't turn coal mines on and off with the flick of a switch.
The thing that distinguishes Rhino, though, is its over 13% yield. That's a high figure, but Rhino's Walton believes the partnership has "substantial flexibility to maintain distributions on our common units ... [and] the flexibility to grow opportunistically within the energy sector." The big impact from the new mine will be felt next year, but with a debt-free Rhino you can get paid handsomely to wait without too much risk. That said, like CONSOL, Rhino has a new coal mine ready to open for business. The mine already has a contract in place and is sending test coal to additional customers. If the test runs lead to contracts, Rhino believes it can double or triple production from this mine. In other words, if there is increased demand, both CONSOL and Rhino are in good position to meet it while others will have to restart idled operations.
If CONSOL and Rhino are right about the coal market turning a corner, there's a lot more upside potential than downside risk. Now is the time to take a deep dive into high-yielding Rhino for more aggressive investors.
A coal resurgence, however, won't dent the natural gas opportunity
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