We at The Motley Fool have given a lot of time and thought to those carbonaceous hunks of former dinosaurs called coal. We've talked about coal miners such as Arch Coal (NYSE:ACI), coal equipment makers such as Joy Global (NASDAQ:JOYG), and even coal by-product companies such as Headwaters (NASDAQ:HDWR).
Well, here's one more for you coal-bugs out there: Penn Virginia Resource Partners (NYSE:PVR). As the name suggests, this isn't your ordinary coal company. Rather, Penn Virginia is a master limited partnership (MLP). MLPs are managed like corporations, but they pay out a higher amount of cash flow because their legal structure exempts them from federal income tax.
Simply put, Penn Virginia owns coal properties and leases them out to miners such as Peabody Energy (NYSE:BTU) or Massey Energy (NYSE:MEE), which mine the coal and pay a per-ton royalty to Penn Virginia. The company generally looks to lock up production under contracts, and most of its coal assets are already under contract for 2005 and 2006.
Penn Virginia has been on a tear as investors have bid up most companies that have some tie to coal. These shares are up about 52% over the past year, and the dividend yield has dropped from more than 7% in mid-2003 to a bit over 4% today.
For the fourth quarter, Penn Virginia reported 28% higher revenue ($19.5 million) and 24% higher distributable cash flow. Although distributable cash flow is not a generally accepted accounting principles measure, it is a legitimate means of assessing the company's dividend-paying capability. To that end, the company announced a $0.5625 per-share distribution to be paid on Feb. 14.
During the quarter, the company began executing a strategy to diversify beyond coal mines. The company purchased a midstream natural gas business that should generate an incremental $25 million to $28 million in cash flow for 2005. The company also formed a joint venture with Massey Energy for an end-user coal handling facility.
While Penn Virginia has attractive income aspects, investors need to be a bit wary of valuation and do their own due diligence. Even management believes that the coal market has been bid up significantly. With Penn Virginia trading at only about 20 basis points above the 10-year Treasury note, its yield premium is extremely low.
Investors must also be aware that there are unusual tax consequences from owning shares in an MLP. So for those Fools who already have complicated individual tax situations, or those who simply don't want any additional tax hassles, these shares might not be appropriate.
For those Fools who are comfortable with the tax aspect and valuation, Penn Virginia is a very interesting way to play the current bull market for coal. While no one should expect a repeat of last year's phenomenal share price appreciation, investors looking for an income-oriented play on coal should give these shares a look.
Fool contributor Stephen Simpson, a chartered financial analyst, owns shares of Headwaters.
