Major Coal MLP Continues to Diversify Its Assets
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After suffering from the bloodshed in the coal markets over the last few years, Natural Resource Partners (NYSE: NRP) has recovered from its recent lows reached in the fourth quarter of last year. While coal will continue to supply the bulk of the revenue to this Master Limited Partnership (MLP), management recognizes the uphill battle in the coal industry. To that end, some recent acquisitions should serve to further diversify revenue and cash flow away from coal into industrial minerals as well as oil and gas.
In just over a year, the company has made several strategic acquisitions in an effort to increase its non-coal related revenue and earnings before interest, taxes, depreciation and amortization (EBITDA).
Oil and natural gas acquisitions
Late last year, the company acquired approximately 88,000 net acres in the liquid-rich region of the Marcellus Shale. The property contains producing wells and is fully leased. According to the company, significant additional development is planned for the acreage.
Just this month the company announced the acquisition of 13,500 net acres in the Williston Basin targeting the Bakken and Three Forks formations for $35.3 million from Abraxas Petroleum. The acreage is held by production and has an average working interest of 11%. There are currently 120 producing wells and interests in 22 additional wells in various stages of development.
In addition to these more recent acquisitions, the company reported that it had acquired an approximately 19,200 net acreage position in Oklahoma targeting the Mississippian Lime play for approximately $64 million in a deal that began unfolding in December 2011.
Mineral and aggregate acquisitions
One of the more significant acquisitions was Natural Resource Partners' $292.5 million acquisition of a 48.5% general partnership interest in OCI Wyoming L.P. as well as 20% of the common shares and all of the preferred shares of OCI Wyoming Co. In addition to the upfront acquisition costs, the MLP may be required to pay the seller up to an additional $50 million if certain revenue targets are met over the three years following the acquisition.
The acquisition gave the company an interest in the world’s fifth-largest producer of soda ash and will contribute significantly to 2013 revenue. In 2012, aggregates and industrial minerals only contributed 2% of revenue; however a pro forma for 2012 shows that with the OCI Wyoming acquisition, this segment would have produced 16% of revenue. OCI Wyoming operates a trona-ore mining operation as well as a soda ash refinery in Green River, Wyo.
Other coal MLP’s taking a diversified approach
Natural Resource Partners is not the only MLP taking a diversified approach to the coal business. Penn Virginia Resource Partners (NYSE: PVR) has been shifting its business to derive more EBITDA from natural gas midstream operations. In 2011, the midstream operation supplied 37% of EBITDA, which grew to 56% in 2012 and is projected to be at approximately 78% by the end of 2013.
One of the reasons for the substantial increase in 2012 and 2013 was the May 2012 game-changing acquisition of Chief Gathering. The Chief acquisition significantly increased Penn Virginia's exposure to the midstream business and its presence in the Marcellus Shale.
The company has two major midstream operations servicing the Eastern and Mid-Continent regions of the United States. In the East, the company’s operations are predominantly located in Pennsylvania and service exploration companies in the Marcellus Shale and the Utica Shale. The Mid-Continent operations are located in Texas, Oklahoma and Wyoming with facilities serving the Anadarko Basin, Cline Shale, the Tonkawa Formation and the Powder River Basin.
The coal operations of Penn Virginia are primarily located in Appalachia as well as the Illinois and San Juan basins. The Appalachia region accounts for 76% of royalties and 77% of reserves. Penn Virginia also owns 249,000 acres of timberland and has 6.4 Bcfe of oil and gas reserves.
While not as diversified as the previous two, Rhino Resource Partners (NYSE: RNO) derives approximately 10% of its revenue from non-coal mining operations. These include coal mining-related services such as trucking, mine construction, maintenance and post-mining reclamation.
The partnership also owns oil and gas interests in the Utica Shale and the Cana Woodford region of western Oklahoma. Recently, the company has formed several small ventures to provide services to the oil and gas industry operating in the Utica Shale. These services include drill pad construction, supplying fracking sand and possibly the construction and operation of a condensate river terminal. Rhino expects cash flow from its Utica Shale project to increase over the next month or two as additional takeaway capacity comes on line.
While we all like to see stock prices increase, MLPs tend to pay a healthy dividend making a more stable stock price with limited downside in difficult markets an important component. All three of these MLPs are working to diversify their assets in order to preserve the dividend and make the stock less volatile.
Already the holder of geographically diverse coal properties with reserves located in Appalachia, the Illinois Basin and the Power River Basin, Natural Resource Partners' recent efforts to diversify its assets into other commodities should serve to support the stock in weak coal pricing environments. Revenue from sources other than coal royalties is expected to be approximately 37% in 2013. This is up from 31% in 2012 and only 11% in 2005. While shares are down 40% from their two-year closing high, the stock has shown much more stability year-to-date.
Strong demand for natural gas should continue to power earnings at Penn Virginia Resource Partners. EBITDA from the MLPs natural gas midstream operations exceeded 50% for the first time in 2012 and is expected to be approximately 78% in 2013. This has helped the stock of Penn Virginia remain stable while many coal related stocks were being crushed. Rhino is still the most dependent on coal of the three and it shows in the stock price. Shares of Rhino are down over 50% from their two-year closing high and the shares are still very tied to coal.
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