Natural Resource Partners (NRP +1.04%) is a coal and diversified natural resource company structured as a master limited partnership, or MLP. The company takes great strides to point out its recent diversification efforts, but its unit price is still tied closely to coal fundamentals. With coal prices likely on the rise, albeit modestly, earnings from that segment should not be a drag going forward. More important is growth coming from the company's other segments.
Company description
Natural Resource Partners has been diversifying away from being only a large owner of coal reserves that it leases to coal producers. That business served the company well for decades. With the downturn in coal over the past three years, however, the company prudently made a change.
Now, Natural Resource Partners controls 500 million tons of aggregates, interests in over 1,300 oil and gas wells, 11 million mineral acres, and a significant joint venture soda ash operation. Of course, it still owns 2.3 billion tons of coal reserves as well. Even in a depressed coal market, 2.3 billion tons represents substantial asset value. Revenue from sources other than coal was 35% in the latest quarter vs. just 5% in 2005.
Of the 65% of coal-related revenues, not all of that is highly depressed; only the best reserves and most efficient coal infrastructure remain in service during a downturn, so the cutbacks should be close to done. For example, just 15% of coal reserve leasing revenues comes from hard-hit central Appalachian thermal coal.
I believe that the 35% of non coal-related revenues will reach 50% of total revenues by the end of 2015. For example, the company has stated that oil and gas revenues will more than double in 2014 vs 2013. These revenues are high quality. Hi-Crush Partners LP (HCLP +0.00%), is a non-coal minerals MLP with high-quality revenues that are highly concentrated in the frac sand business. It offers a yield of 4.2%.
Recent unit price volatility proved to be a buying opportunity
Units of Natural Resource Partners recently traded (briefly) below $13 vs. $15.5 today on two news items. First, Nick Carter, COO of the company, announced his retirement. Nick has been the face of Natural Resource Partners for the past two decades. I spoke with Nick about his retirement and we discussed at length a number of people that are very well prepared to carry the operations forward. Nick's succession had been in the works for two years, and neither Nick nor I believe the new management team will have any serious troubles.
The other bit of troubling news was on the EPA front, and this news came within a day or two of Nick's retirement announcement. On June 2, the EPA proposed a new set of rules designed to cut carbon dioxide emissions at U.S. power plants 30% by 2030. All coal stocks were hit that week. However, as is often the case, the devil was in the details as it appears that each state will have flexibility in how it adopts the latest EPA ruling.
NRP's yield can't be beat
In an otherwise fully valued stock market, I believe that Natural Resource Partners' yield is highly attractive. While distributions aren't growing, I believe they're safe. Its yield is nearly twice that of another coal MLP that I like very much, Alliance Resource Partners (ARLP 1.56%). Alliance is head and shoulders above the rest in terms of debt leverage, operating margins and has had distribution growth of 11.1% over the past five years. You can also compare Natural Resource Partners' 9.2% yield to Peabody Energy's (BTU +0.00%) yield of just 2%. Peabody is saddled with excessive debt after an ill-fated coal acquisition in 2011.
Bottom line
Natural Resource Partners' offers a yield that's very hard to find anywhere else. The elevated yield is largely due the fact that the company still derives 65% of its revenues from coal and coal-related sources. However, the mix is headed away from coal toward oil and gas, minerals, and other industrial materials. On top of that, the worst of the coal market downturn appears to be behind us. I continue to consider Natural Resource Partners a solid long-term investment for yield-starved investors.
