Going back to NRP's interest in OCI WY, if their stake is truly marketable at $500MM and there is buyer, that is another feather in the cap to allow NRP to reduce its debt load to its target levels with some ease.
Is the fear surrounding NRP the inability for it to rollover its debt? The market price for the materials, particularly their high-margin coal, is low, but still remains highly profitable.
You could theoretically spin out the non-coal assets into a separate unit. You could further reduce distribution $40M+ per year.
They have a lot of operating cash flow, have significantly reduced debt and have a lot of ammo in terms of assets and strategic options to avoid a default. If they took a straight $200M asset write down on their balance sheet, book value is still over $4+ per unit. I doubt they will do this, but every 1M shares they buy back (call it $3M) saves them $360,000 in outflows, which can be used to further reduce debt.
PART 2 - Both coal and oil are at very, very low prices. Maybe they will stay that way. If they do, NRP is still generating money from them. MRO CEO said they can be profitable at $45-$50 per bbl of oil. Sure, we all want it worth more, but again, there is a floor at some point.
NRP cut distribution to pay down debt - they did exactly that. Took $27M of $32M of distributions they cut to repay debt past quarter. Not bad. There is another $44M potentially available per year by reducing distribution to reduce debt. Obviously, we want higher distributions, but as a shareholder, the $40M+ debt repaid so far n 2015 stays in the family as they say. If they cut the distribution to make payroll or create an expense, that would be worry some. By reducing debt, it benefits the ultimate value of the units.
A basic finance lesson I learned many years ago was to look at statement of cash flows, if cash flow from ops and investing were negative and cash flow from financing were positive, big red flag. NRP has positive operating cash flow, negative cash flow from financing and modestly negative cash from investing activities (and right now probably is not a horrible time to pick up assets).
Some quick napkin math to meet their 3.5X Debt/AdjEBITDA ratio suggests over the next, say 18-24 months they will need to reduce debt by around a maximum $400M - 50%+ of that comes from existing distribution cut easy. Another 25% is potentially available from reducing the existing distribution if push comes to shove. Leaving NRP only needing to come up with $100M-$200M to reach that target. And again, we are assuming zero improvement in EBITDA, which is possible of course, but not likely. Again, cutting distribution to pay an 'expense' is worse than using that available cash to reduce exposure elsewhere on the balance sheet.
PART 1 - I am fairly new to NRP - been watching it since it hit the teens way back - started buying at $7. Have since average down to mid-3s thanks to selling puts and some aggressive buys at $2.50ish levels. Obviously, a high risk investment as noted by the low unit price and the high yield at these levels.
In my mind, here are the realities - they own rights to a variety of resources - coal, soda ash, oil, etc. They started moving away from coal in the recent times - whether it was diversification or managers saw coal prices taking a pummeling. Who knows.
They have always been fairly transparent in their quarterly reports - things are bad, things are good, etc. I don't see them trying to hide much. Their biggest challenge, of course, is the repayment of debt. I envision a doomsday scenario where the creditors may actually try to force a default to some degree to then claim the underlying assets, which are likely very valuable at the end of the day. I mean, if you're holding the pink slip, why not? As for creditors taking operating control, it happened to the Cosmopolitan in Las Vegas - for a while Deustche Bank took ownership for a while and owned and operated the project. Pretty big windfall for them.
So, the bet here is that bank simply want to be in the business of lending money and earning interest (very likely), don't want to foreclose/take control (very likely) and that the world/country has some use for these natural resources that are being pulled out of the ground.
A shrinking % of revenue is coming from coal - good thing considering the macro-environment. However, coal is not going away. Although it may be possible less will be consumed, particularly in USA, the demand is not going to zero. That is, the coal in the ground is still worth something. NRP discussed how they are somewhat protected per the ANR Bankruptcy issue. So, as long as SOME coal is still being used, I suspect we will see a stabilizing of price and supply....