Sunday, July 22, 2012

Good News For Coal MLPs

Peabody Energy’s (BTU) chairman and CEO, Gregory Boyce, stated in June 2010, “I believe we are in the early stages of a long-term super cycle for coal.” Boyce pointed out that coal had been the world’s fastest-growing fuel over the last decade. Boyce expects this trend to continue with Asian nations building more coal-fired power generation plants. He said that more than 94GW of new power generation plants were supposed to come online by the end of 2010, resulting in 375 million tons a year of coal consumption.

Boyce speculated that the current pace of generator addition would add another one billion tons of new thermal coal demand every three years. Boyce further stated that steel demand was expected to increase by 50% by 2020, with a similar increase in demand for metallurgical coal expected. Boyce stated that seaborne coal demand should increase by 300-400 million tons by 2015, with China and India responsible for one-half to two-thirds of this new demand growth.

In support of CEO Boyce’s statements, U.S. coal exports increased 35% to 53.6million tons through June 2011. Strong demand from Asia and Europe for steam and metallurgical coal is expected to push U.S. coal exports above 100 million tons by the year’s end. Even with slight US weakness in coal demand due to “green” initiatives, the total demand for U.S. coal should be strong. This means coal MLP’s should produce healthy profits. With exports to Asia expected to increase strongly again in 2012, this demand should remain strong. U.S. coal MLP’s should be an excellent place to hide out in these troubled times.

The chart below shows the strong world trend in coal consumption.

The EIA projects that coal will maintain its approximate 21% share of the world energy consumption projected through 2035. As economies and energy demands grow, coal demand will grow in lock step. This should help an investor feel good about investing in coal.

Two U.S. coal MLPs you might want to look at are: Penn Virginia Resource Partners LP (PVR) and Natural Resources Partners LP (NRP). They both pay great dividends. A brief description of the business of each is below. PVR is a great dividend payer at $2.00 (7.80%). The following slide gives an overview of its business segments:

The chart below shows the steady Midstream Throughput volume increase (i.e. royalty revenue increase):

The chart below shows the coal royalty revenue increase trend:

In sum, PVR shows good potential for future growth in both stock price and distributions. It does not mine the coal itself, so it has few worries about those expenses. It has increasing midstream capabilities. These are increasingly in demand given the success of the fields PVR has chosen to service (primarily the Marcellus and the Granite Wash).

NRP is a great dividend payer at $2.20 (7.30%). It has 2.3 billion tons of proven and probable coal reserves in three major coal producing regions. It has 228 million tons of aggregate reserves. It leases reserves to experienced mine operators. It owns and leases infrastructure assets including transportation, handling, and processing facilities. The following chartshows the distribution of NRP’s businesses.

Its coal EBITDA margins are the best in the industry, as shown in the chart below:

Notably, approximately 25% of US metallurgical coal is produced from NRP properties. This may be part of the reason the coal EBITDA margins are so good.

In addition to its standard businesses. NRP formed a joint venture with International Paper (IP) in June 2010 (BRP). The JV owns and manages approximately 7.4 million acres of mineral rights previously held by IP. NRP paid $42.5 million for its interest, and it has an annual cumulative preferred distribution of $4.25 million and 51% of any excess income. The sources of income include oil and gas royalties, coal royalties, aggregate royalties, and cell towers. The JV has many more planned revenue sources from these properties in the future, such as coal bed methane, geothermal, water rights, precious metals, and industrial minerals. This sounds like it should be an excellent source of future growth and future revenues.

The chart below shows NRP’s revenue growth and diversification. The trend is very positive. It gives one confidence NRP may continue to do well:

The table below contains a some of the financial fundamentals of these two companies. The data are from TDameritrade and Yahoo Finance:

Stock

PVR

NRP

Price

$24.17

$29.50

1 yr. Analysts’ Target Price

$30.67

$35.80

Forecast 1 yr. % gain

27%

21%

Dividend

$2.00 (7.80%)

$2.20 (7.30%)

PE

15.58

28.81

FPE

14.56

15.28

Avg. Analysts’ Opinion

2.4

2.0

Miss or Beat last quarter

-$0.13

+$0.15

FY2012 EPS Estimate

$1.66

$1.93

FY2012 EPS Estimate 90 days ago

$1.73

$1.96

EPS % Growth Estimate for FY2011

69.90%

23.40%

EPS % Growth Estimate for FY2012

17.70%

1.60%

5 yr. EPS % Growth Estimate per annum

4.00%

4.00%

Market Cap

$1.72B

$3.13B

Enterprise Value

$2.64B

$3.79B

Beta

1.07

0.78

Total Cash per Share

$0.20

$1.42

Short Interest as a % of Float

0.30%

0.90%

Both of these companies look sound. They both pay great 7%+ dividends. They both have good potential for growth. They both have sound longer term strategies. Fundamentally they can be bought. The-two year charts may lend some technical direction to a trade.

The two-year chart of PVR is below:

The slow stochastic sub chart of PVR shows that it is currently oversold. It is below both its 200-day and its 50-day SMA. Technically it can be bought now. The only gotcha is the overall market. Due to the problems in the EU, especially those in Italy and Spain right now, the markets could continue going down. PVR has fairly good support approximately where it is now. However, in a bad market it would seem likely to be able to make it down to around $20/share. If you are buying for the long term, you can start legging in now. If you are more unsure, you may want to try to buy at a level closer to $20. This should provide you with good support for a long-term position.

The two-year chart of NRP is below:

The slow stochastic sub chart of NRP indicates that it is in no man's land as far as a buy or sell indication. Technically you can start legging in now. However, in a bad market NRP could go down further to better support at $26/share or $22/share. You could wait to try to get a better low if you think the EU crisis will bring the US markets down further. You could start legging in at $26. You could leg in further if it went lower. With its great dividend, it is not likely to fall through the floor.

It may do anything in a panic, but it should rebound quickly to a reasonable value. Plus the fundamentals should continue to push it upward for the long term. Meanwhile you get to collect a 7%+ dividend. Both of these stocks are also forecast to appreciate in price by 20%+ within the next year. A good possibility of a 30% return is considered quite good by most people.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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