After a name change last summer, PVR Partners (UNKNOWN:PVR.DL), formerly Penn Virginia Resources Partners, set out on a path to switch its business model from coal-oriented loser, to natural-gas-and-coal-diversified winner. This master limited partnership has a lot going for it, so today we're going to take a closer look.
The right way to play coal
Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) made headlines when it announced that it planned to augment its terminals business by buying up natural resource properties and charging a fee for its customers to mine them. It seemed like a great way to play coal while mitigating commodity risk, it seemed new and different, but PVR Partners has been doing that forever! Really, though, since 1882.
PVR controls about 871 million tons of coal reserves, and it does not mine them. Instead, its coal customers are some of the bigger names in the industry, including Arch Coal (NASDAQOTH:ACIIQ) and Cliffs Natural Resources (NYSE:CLF), and they do the dirty work. Those two companies were among PVR's lessees that mined 30.2 million tons of coal from its 98 mines last year. Though coal volumes are down so far this year, PVR's business is based on royalties and long-term contracts, which means there hasn't been much pain, relative to what the rest of the industry is experiencing.
Additionally, the majority of its coal revenue comes from its properties in Appalachia. The advantage here is the proximity to East Coast export terminals, compared to the mines out West, where export terminal projects are being canceled right and left. Exports are driving the industry as domestic consumption has dropped off in recent years, and therefore the location of these eastern mines is increasingly important.
PVR is not looking to grow its coal business at all, opting instead to focus on developing the midstream side of things. Still, it remains a cash cow for now.
Let's talk money
The other thing PVR has going for it, that will be especially important in the coming days of rising interest rates, is that it acquired its general partner in 2011. Enterprise Products Partners (NYSE:EPD) is one of the other rare examples of an MLP with no general partner, that therefore does not pay out a 2% GP stake, or incentive distribution rights.
This type of structure leaves a lot of cash leftover to plow back into the business, pay off debt, or pay out to unit holders. And that means PVR has a lower cost of capital than the competition, which will prove to be invaluable when interest rates rise down the line.
Beginning last year, PVR has launched several projects that point to sustained profitability. Most notably was its acquisition of Chief Gathering in the Marcellus Shale, which gave PVR six natural gas gathering systems spread out over 300,000 acres.
The partnership's other assets are in the Texas and Oklahoma panhandle regions, and this segment is particularly exposed to commodity risk. PVR has announced its ongoing effort to mitigate that risk by switching from margin-based revenue generation to fee-based revenue in its natural gas midstream operations. It's already made dramatic improvement in this effort, growing from 30% fee-based revenue to an estimated 80% fee-based revenue in just three years.
One other important thing to note is that PVR's distributable cash flow did not cover distributions in 2012 as it had done for the previous four years. Management claims that this was because of the Chief acquisition and was expected. Its target distribution coverage ratio is now 1.05-1.10 times payouts, which it expects to achieve by the second half of this year. First-quarter adjusted EBITDA was up year over year, so it is certainly on the right track.
Let's face it, the big companies get the headlines and that leaves companies like PVR floating under the radar. We praise the Kinder Morgans and the Enterprises for their entrepreneurial daring and low cost of capital, and ignore the small guys that employ the same strategies. PVR Partners reports earnings on July 22, investors looking for a new opportunity should pay close attention.
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