Natural Resource Partners LP (NYSE: NRP), a limited partnership with a massive 19% yield, was basically a coal royalty company a couple of years ago. Realizing that it needed more diversity, it's been breaking into new natural resource categories of late. Its recent move into the oil and gas field, however, isn't panning out as well as hoped.
Then and now
In 2012, Natural Resource Partners generated roughly 94% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from its coal operations. To be fair, the company doesn't actually run any mines. It leases mines to others, so it's a high margin and relatively low risk business (the mine operator takes on all the costs and risks of running the mines). That said, falling coal prices still impact Natural Resources Partners' royalties, a fact that's been on clear display in recent years as the partnership's coal revenues have declined.
So Natural Resource Partners has been diversifying. At the end of last year roughly 63% of its EBITDA came from coal and it expects that number to drop to between 50% and 60% this year. While some of the decline is because of the weak coal market, the other reason is Natural Resource Partners' push into new areas, specifically aggregates and oil and gas, which taken together made up roughly 37% of the partnership's EBITDA last year.
Aggregates include such things as soda ash, frac sand, limestone, and gravel and makes up nearly 24% of EBITDA. Oil and natural gas accounted for 13% of EBITDA. But here's the problem: Oil was trading at much higher prices up until July of last year. With oil off roughly 50% since that point, oil and gas, while a relatively small portion of EBITDA, looks like it could be a near term drag on performance even if Natural Resource Partners still likes the long-term opportunity it presents.
Baked in the cake
With the partnership's coal segment under pressure and the costs involved with diversification efforts, it isn't surprising that Natural Resource Partners trimmed its distribution last year. That cut allowed it to cover its distribution by roughly 1.35 times in 2014; it wouldn't have covered the distribution without that cut.
The problem is that management expects its coal and oil and gas segments to be weak this year, too. Coal revenues are expected to fall at least 2.5% and oil is projected to be roughly flat, with increased volume offset by lower prices. Expansion in aggregates is the big offset, where revenues are expected to at least triple.
Right now the expectation is that this will allow the partnership's distributed cash flow to come in at around $175 million on the low end. That should be enough to cover the current distribution. But with an around 19% distribution yield, it doesn't look like the market believes Natural Resource Partners can do it.
And the two oil and gas deals the partnership's done over the last two years isn't helping that perception. Indeed, what if oil prices haven't found a bottom? Natural Resource Partners' projections assume an average West Texas Intermediate oil price of $52 per barrel. Although recent prices have been hovering above $50 recently, oil prices have gone below $45 a couple of times this year and it doesn't look like global oil production is starting to fall off because of low prices yet. Even Natural Resource Partners is expecting more oil to flow from its own wells.
And while you can take solace in the fact that the number of oil rigs drilling in the United States is down nearly 50% year over year, global players like OPEC are still running full bore with the unstated goal of pushing oil prices low enough to force competitors out of the market. That's leading some to suggest that the current oil uptick is a head fake, with even lower prices to come. So despite recent oil price strength there's notable potential for the partnership's oil expectations to miss the target, which would mean Natural Resource Partners' results could be weaker than expected.
Little things can matter a lot
Clearly for Natural Resource Partners coal should be the biggest concern. But oil and gas, expected to be around 10% of revenues this year, shouldn't be overlooked. If the $52 per barrel estimate for West Texas Intermediate crude doesn't hold up, this partnership will have a harder time covering its distribution than it currently expects. So if you are daring enough to step into this 19% yielder, watch coal but don't forget about the troubles oil is facing. Essentially, aggregates (projected to be 30% to 40% of EBITDA) could be left holding the performance bag, so to speak. And that means that oil might turn out to be the straw that breaks this camel's back.