I'll give you another (sort of) coal MLP to look at. Everyone knows that met coal is used in making steel. What I didn't understand is that met coal has to be turned into coking coal before it can be used. This process seems to be like making charcoal - you partially burn the met coal and what's left burns even hotter than the met coal would, so the steel furnaces can use it. (Yes, I know, this is simplistic and probably wrong, but I'm an accountant and it helps me understand things.)
So a coking company, SunCoke Energy Inc just created an MLP - SunCoke Energy Partners. Without boring you with the details, Partners has 3 coking plants, and has contracts with 2 steel companies to take all of the production. The contracts last until 2020 and 2 of them can't be cancelled. the 3rd can be cancelled, but only on 2 years notice and only if they are shutting down the steel mill permanently. In addition, SunCoke Parent Company has (1) guaranteed the steel companies' performance for 5 years, and (2) has subordinated its units in Partners to that the public unit holders get paid first. Finally, there are some opportunities to grow the business.
Partners yields about 8% - 8.5% and it looks pretty safe to me, at least during the guarantee period.
Fair warning - I'm still thinking about this one, so do your own reading. Most of my understanding came from a Credit Suisse report. But if you like met coal, this might be a way to play it.
Not a bad result, really, imho. Considering the shape that coal is in, this looks pretty good. Looks like NRP will manage to get through the trough in the coal market without touching the distribution - to my mind, this is really remarkable. The real Q, I guess, is how long the trough will last. Coal consumption outside of the US is rising rapidaly the roof and US exports of coal - including steam! - are taking off: by 2015 the widened Panama canal will make it economical to ship East Coast coal to Asia and replace Australian coal (as Australia is experiencing a dramatic rise in production costs). So, with luck, two more years of this at most, I reckon. Now it looks like we can hold onto our distribution in 2013; if they can pull the rabbit out of the hat in 2014, we should be OK.
Will the stock sell off? Who knows what the market will think; but if NMM is any guide, we could actually see a rally: NNM 's industry is also going through very tough times but since they announced that the 2013 distribution was "safe" the stock has started to rally again. There are a lot of fixed income people here who really care about their distribution, so, i imagine that if we go down, it won't be for long.
I hear you on ARLP. I, too, am seriously puzzled to understan how "they do it". Their gross operating margin per ton of coal sold is consistently 46%... Either their clients are stupid or their competitors inept or the coal they sell is a premium brand protected by intellectual property laws or I am really thick.
Sentiment: Strong Buy
Thank you for asking. They haven't issued the 10-K yet obviously so any comments that anyone makes is sort of tentative. But coal is ugly all over, and it's coming home to NRP.
First, met coal royalties have been saving NRP all year, but they really fell apart in Q4, all due to pricing. Met coal production was about 5.3 million tons, the highest quarterly total all year. But the royalty rate was around $ 5.15 per ton, which is $ 2 lower than the rate in any other Q this year. (Actually, it's only $ 1.87 lower than in Q3, but why quibble?) So met coal royalties in total were the lowest they've been all year.
But thermal coal is the real puzzler. Around a year ago, NRP disclosed a lot of production at a mine in Southern App, where the lessee found a lease from the 1960s that carried an incredibly low royalty rate that NRP was stuck with. But that was a pretty small amount. This Q, production tripled in Northern App, but the royalty rate dropped to $ 1.03/ton. To put it in perspective, the royalty rate for thermal coal in NAPP has been in the $ 3.50 - $ 4 range this year. I don't remember if NRP does earnings calls, but if they do, someone needs to ask the story behind that disaster.
Finally, NRP has been talking up its investment in Illinois Basin all year, and I don't see that as being anything great.
So NRP made the Q, but income included $ 10 million on nonrecurring items (sale of a right of way under a condemnation award and minimum royalties recognized as income). You might remember the last time NRP had a large amount of minimum royalties recognized as income - it was the mine that was abandoned at the end of 2011. It's when the lessee prepaid some royalties, and then forfeits the payment. Not a good sign for future income from that mine.
All of this sounds really negative, but it isn't. Coal right now is a lousy business to be in, and NRP did extremely well under very difficult circumstances. The only coal company I follow that out-performed NRP was ARLP, and I don't know how ARLP does it.
But that's all in the past. The key is their guidance for 2013. I'm going to add another message in case Yahoo thinks this one is too long.
I like the way NRP did its guidance - they say that under the way we normally compute DCF, it would be a disaster, so let's change the way we compute DCF. Up until now, they have reduced DCF by debt principal payments. I don't know any other MLP that does this, so to NRP's credit, they were being very conservative. Now they aren't going to be conservative any more.
In 2013, NRP needs $ 240 million of DCF to cover the distribution. Up until 2013, DCF was computed AFTER deducting debt principal payments. Now they say they don't intend to repay the debt right away - they are going to refinance it (sort of sounds like the US government, except I don't think we ever tried the repayment route). So magically, DCF isn't needed to repay debt, and there's enough (barely) to cover the distribution. Keep in mind that in 2012, 10% of DCF was generated by the sale of assets, hardly something you want to count on for the future.
So overall, my thought is that NRP is the safest way to invest in coal, if you want to invest in coal. But I think that once people analyze the Q4 numbers and the 2013 projection, you'll get a chance to buy NRP a bit cheaper.