This MLP Provides Yield Today, Growth Tomorrow

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I recently published an article on Natural Resources Partners (NYSE: NRP), a Master Limited Partnership, see here. I believe I made a compelling case that NRP's distribution is safe. At a yield of 12.5%, this is an attractive, risk-adjusted total return opportunity. Here is a quote from my article reminding readers what NRP does, 

"NRP engages in the business of owning, managing and leasing mineral properties in the U.S. NRP owns 2.3 billion tons of proven and probable coal reserves in the three major coal-producing regions of Appalachia, the Illinois Basin and the Western U. S. and 380 million tons of aggregates. The company does not operate any mines, but leases reserves to experienced mine operators under long-term leases."

"Most of the leased coal is produced by large companies with experienced and professional sales departments. A significant portion is sold under long-term contracts. In the coal and aggregates royalty business, NRPs lessees make payments based on the greater of a percentage of gross revenues or a fixed royalty per ton, subject to minimum payments."

Don't Believe Me, Watch the Corporate Presentation

Subsequent to that article I found a new corporate presentation on the company's website, see here. Prospective investors really should look at this presentation. While in recent articles I've focused on liquidity, in this article I discuss longer-term growth opportunities. Again, the single best way to get comfortable with NRP is by looking at the presentation. Or, continue reading.

As of September 30, NRP had $122 million in cash and $197 million available on its credit facilities, for total liquidity of $319. Still, investors remain worried about a distribution cut. This makes little sense, (see the other article). Beyond what I believe to be a safe distribution of $2.20 per unit, there is a growth story to be told.

Substantial Past Acquisitions Have Yet to Fully Contribute to Cash Flows

It's essential to understand that NRP has spent more than $700 million on acquisitions over the past six years. Most was spent on coal reserves and assets in the Illinois Basin, "ILB." Investors are understandably worried about NRP's large coal exposure, but the ILB is the best basin in the country. Low-cost operations, minimal legacy liabilities, high heat content, and good proximity to domestic markets in the Midwest and Appalachia as well as exports through the Gulf. NRP has spent more than $500 million in the ILB. Cash flows from this investment will be increasing for years to come.   

Since the company has no operating activities, meaning it does not mine any minerals or coal, it avoided the mistakes of Alpha Natural Resources, (NYSE: ANR), Arch Coal, (NYSE: ACI) and Walter Energy, who made large, ill-timed acquisitions in 2011. Each is now saddled with uncomfortably high debt levels. Ratings agencies S&P and Moody's have downgraded all three companies. And Arch and Alpha have issued expensive debt to shore up their balance sheets, (Arch 10.75% yielding bonds, Alpha 10.0% yielding bonds).  

50% of Cash Flows From Non-Coal Royalty Revenues within 4-5 Years

NRP is diversifying away from coal in a meaningful way. The company has spent well over $200 million in recent years on Aggregates, Oil & Gas, and other natural resource assets. Collectively, these assets are far from fully utilized. From 2014, annual growth of 5%-7% could be in store from this portion of NRPs business. Therefore, offsetting flat coal performance are stable growing non-coal royalty sources that could reach 50% of total cash flows within 4-5 years. 

Yield Today, Growth Tomorrow   

Once NRP returns to moderate and stable growth, probably from 2014 on, the company's distribution should start to rise again. As the company's outlook improves the required yield demanded to hold the units could fall significantly. From 12.5%, I believe it could comfortably fall to 9% in 2 years. Assuming an unchanged $2.20 annual distribution, the unit price would increase to $24.5. While that may not seem that exciting vs. the current price of $17.5, the total return would be 65% after banking a 12.5% yield two years in a row.

 


MockingJay2011 owns shares of Alpha Natural Resources and Natural Resource Partners LP, He may buy more of each company in coming days. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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