Rhino Resource Partners (RHNO) is a coal focused miner. However, like CONSOL Energy (CNX 2.36%), Natural Resource Partners (NRP -0.27%), and Penn Virginia Resource Partners (NYSE: PVR), it's been broadening its reach to include natural gas assets. That's been a big part of the company's growth story, so why did it just agree to sell out of natural gas?
The lean years
Both metallurgical and thermal coal have been in a downward spiral over the last year or two. Rhino, for example, saw coal revenues fall 22% in 2013. That was a combination of falling prices and fewer tons sold. Rhino isn't alone.
Natural Resource Partners saw its production fall 2% with coal royalty revenues down about 18%. Although revenue from the partnership's other businesses was up almost 25%, these operations contribute about half as much as coal to the top line. Worse, with a heavy debt load, Natural Resource Partners cut its distribution heading into 2014.
Part of the reason for Natural Resource Partners' debt burden, however, is expansion beyond coal. For example, it's been buying non-operating interests in natural gas fields and acquired a stake in a soda ash business. The decision to trim the distribution was made to ensure the company could continue along the path toward diversification.
CONSOL Energy has also been shifting toward gas, with the recent sale of about half of its coal assets essentially turning it from a coal company with some drilling assets to a drilling company with some coal assets. Management made the decision that there was more opportunity for growth in drilling than there was in mining.
CONSOL kept its lowest cost coal mines and key coal infrastructure, but has indicated that after completing some key coal projects, it's just going to focus on maintaining what it has on the coal side. CONSOL is a very different company than it was just a year ago.
PVR is another coal company that's turned into a natural gas play, only PVR has focused on owning infrastructure. Like CONSOL it announced that it wasn't going to be spending much on coal in the future, instead focusing on its growing pipeline business. Then it agreed to be bought out by Regency Energy Partners (NYSE: RGP) for $5.6 billion. Interestingly, coal wasn't mentioned once in the press release announcing the deal.
What's Rhino doing?
So while everyone else is looking to get out of coal, Rhino just got out of gas, what gives? The answer lies on the balance sheet. Note that Natural Resource Partners cut its distribution because of elevated debt levels. Rhino will, effectively, be debt free once the gas sale is complete.
According to Rhino CEO Christopher Walton, "In the coal sector, many producers are burdened with high levels of debt. The Utica sale eliminates that concern for us and gives us the flexibility to look for opportunities to expand in both coal and other energy assets."
The deal is so fresh that management didn't have enough time to work out post-sale 2014 projections. If you own Rhino, make sure to watch for that guidance. However, the bigger issue is what Rhino is going to become now. If you bought in because of the push into gas, it looks like your thesis just went up in smoke. It's two near-term goals are completing its first Illinois Basin mine and the natural gas sale.
The story is the same
However, somewhere in the middle of the year, the miner could find itself back at the bargaining table. What might the partnership buy? David Zatezalo, Chairman of The Board of Rhino's general partner, summed it up, "...longer term, anything is open..." And with no debt, a weak coal market is unlikely to push Rhino the way of James River Coal (NASDAQ: JRCC), which is currently exploring its strategic options. It might be a good idea to give Rhino more time before making the decision to sell out of this one if you already own it.
If you prefer to keep focused on U.S. oil and gas...