Natural Resource Partners LP (NYSE:NRP) just eviscerated its distribution, cutting the payout 75%. That's painful and investors reacted in predictable fashion, sending the units sharply lower. But step back for one moment. Now that the damage is done, is this partnership finally ready to grow?
A changing core
In 2012, just a couple of years ago, Natural Resource Partners' business was all about coal. In fact, roughly 94% of its earnings before interest, taxes, depreciation, and amortization, or EBITDA, came from coal related operations. Coal has been a rough business, and Natural Resource Partners was keenly aware of this fact. So it started to diversify.
The effort to move away from coal has had a big impact. At the end of 2014, the partnership's non-coal business went from 6% of EBITDA to 37% or so. And this year that number is expected to be between 40%-50%. While a drop in coal revenues is partly responsible for this shift, several acquisitions in oil and gas and the aggregates space were bigger contributors.
Building off of coal
The basic idea of the shift was to use coal to build a broader portfolio of assets. In theory that's a smart move. In fact, CONSOL Energy (NYSE:CNX) basically did the same thing, shifting from coal to natural gas. CONSOL started the process much earlier, however, and exited its least desirable coal operations in late 2013. That changed the company from a coal miner with gas assets to a gas company with some relatively well-positioned coal assets.
Late start aside, Natural Resource Partners' efforts to diversify relied on a drastic increase in its debt load. Putting numbers on that, it started 2012 with around $840 million in debt on the balance sheet. At the end of last year that number had ballooned to nearly $1.4 billion. Explained another way, debt is 67% higher than it was just a few years ago. It's too bad that coal prices didn't cooperate and the expansion into oil and gas has come at a time when those commodities are facing downward pressure, too.
Retrenching for the future
So at a time when the partnership's interest payments have increased nearly 50%, the new businesses acquired have only increased the top line around 6% or so over 2012 levels. Something had to give eventually, and since coal, oil, and natural gas don't seem ready to rebound, it was the distribution that took the hit (twice, this is actually the second distribution cut in the last 18 months).
With that damage done, what does the future look like for the company? For starters, based on Natural Resource Partners' projections for the year, the current distribution is covered four times over. So, yes, the current payout should hold and a third cut seems highly unlikely.
But, what's the company doing with the $130 million it's saving by cutting the distribution? CEO Corbin Robertson summed it up nicely: "After several years of accelerated growth and diversification through acquisitions, we need to focus our attention on reducing our debt and improving our balance sheet." And it looks like acquisitions are off the table too, with the company noting that, "... organic growth of its aggregates, industrial minerals and oil and natural gas assets," is how it will continue to diversify.
That's a lot more positive than it sounds. Historically, Natural Resource Partners has focused on owning assets that it leases to others. However, its most recent acquisition in the aggregates space, VantaCore Partners, actually operates mines. Since Natural Resource Partners has a whole bunch of aggregates properties that aren't currently being worked, all it needs to do is let VantaCore have at them. So growth potential could easily be rosier than it at first appears.
What does that mean for you? Natural Resource Partners isn't a materially different company than it was before the dividend cut. In fact, it's likely to get more diversified and financially stronger over the next few years. These things will just happen slowly. If you are looking for tax losses, this could be a good candidate. You should have plenty of time to buy back in after 30 days or so. That said, if you are looking for a company that invests in natural resources and is expanding its reach into new areas, now, after the dividend cut sell off, could be a good time.