You're right, but I think they waited too long to do anything else. NRP doesn't give out a whole lot of information so I'm guessing a lot here.
The biggest piece of NRP's debt is the publicly traded notes that come due in 2018. I don't think there are any financial covenants (EBITDA, etc) associated with those notes.
But Opco's debt ($ 900 MM or so) is secured by all of NRP's assets except its interest in OCIW and it has a bunch of financial covenants. If those covenants can be met so that the debt repayment can proceed in an orderly fashion, NRP is probably OK. But if those covenants get triggered and you have lenders fighting for priority, things could get ugly really quick.
They said they were considering a sale of some assets. The best course of action is what you (and Ayscuew) are suggesting - sell some of the worst losers, the coal or oil & gas assets. If something like that could result in any significant amount of cash (and debt paydown), clearly that would be the way to go. I just don't see that happening. The values have dropped too much.
I just happen to think things are worse than people realize (which sounds dumb, I know. Everyone knows that things are terrible for NRP.) So strictly from a perspective of trying to raise some cash, I think there are only 2 alternatives; anything else is just window dressing.
1. Monetize the OCIW interest. Do a merger with OCIR, create IDRS and sell those IDRs to OCIR's parent for cash. Keep as many of the OCIR units as you can, keep the cash flow. But if the debt problem becomes imminent, sell some of those units. It will hurt DCF, sure, but if it avoids an acceleration of the outstanding debt, it might be worth it.
Too long a message. I'll finish in a new message.
I would normally agree that they should sell the losers, but who would they sell the junk to? They waited too long.
SXC (the parent company of SXCP) has a met coal mine that it has been trying to sell for a year now. Most of the mine's production is contracted for, but the contract pricing on the coal is relatively current prices. Carrying value of the mine was almost $ 200 MM and they wrote it down to about $ 10 MM and they still can't sell it.
ARLP bought IB reserves within the last year for pennies on the dollar.
And all of the coal assets secure various loans that NRP owes. So whatever proceeds they might get would partially repay some lender but I don't think the debt paydown would be significant.
And I think that a sale of the Kaiser oil & gas interests that they bought last year wouldn't even bring 33% of what they paid.
So selling the losers is usually the right course of action, but I don't see that as being NRP's best remaining course of action now.
Hopefully they will tell us more in the earnings release. Maybe they are going to sell some coal assets and that's why they pre-announced the impairment charge.
Nucor just reported earnings this morning. Nucor was built on using recycled steel to make steel, as opposed to new steel based on blast furnace technology. It has been shifting to the DRI/EAF method as a basis for its steel production. And Nucor just reported a really good quarter. I don't follow Nucor at all, but I think it did well because the cost of "used" steel for recycling has been coming down faster than the price it gets for Nucor's finished product.
And I think Nucor is all natural gas, not coal, for heating.
I think the only assets that NRP has now that (1) could be sold and (2) could raise any meaningful amounts of cash, are VantaCore and OCI Wyoming.
People on this board have been speculating about or recommending a sale of the OCI Wyoming interest for some time, most recently just a few days ago. That's my bet. It's hard; a sale of OCIW might raise a significant amount of cash, but it also generates a tax liability and NRP will lose some $ 45 MM of DCF per year. But I recall that the last refinancing NRP did included giving the lenders a lien on all of NRP's assets except the OCIW interest.
What I would like to see is a partially tax-deferred sale/merger of the OCIW interest to OCIR, where NRP would get back marketable OCIR units (as well as some cash). They could then do partial dispositions of the OCIR units by doing secondaries. NRP would have to create IDRs for its OCIW units and sell those IDRs to OCIR's new general partner. But that should be do-able.
I just wish NRP would be open for once and tell people, at least in general terms, what portion of their coal leases expire over the next few years, and what amount of minimum royalties will go away with those expirations. Maybe they will have to tell us something in connection with the impairment charge.
And my recent buy won't look too good today, I think.
I did get 1 thing right, though. Back on October 3, when we were talking about the probably Q3 results, I posted "The 2 caveats are: 1. At any time, NRP could write down or impair its coal reserves or oil & gas operations. I don't see them doing an oil & gas impairment, but I'm surprised they haven't impaired the CAPP coal reserves already. This would be noncash, and since the market isn't giving them any credit for CAPP, it's pretty meaningless except that it would slam the quarter's EPS." I've been expecting an impairment charge for several years now.
So the impairment is happening. My first bet is DD Shepard and Dingess Rum, both CAPP properties that they paid pretty hefty prices for back in the good days of 2006/2007. The scary part will be if they impair any of the FELP reserves. Mr. Cline got them to pay top dollar (over $ 2 per ton) for those reserves, and 1 of the FELP mines is having a lot of operational problems.
It was an industry-wide call.
Citi analyst Faisel Khan downgrades some U.S. refiner stocks, believing that narrowing differentials resulting from recent pipeline expansions and production slowdowns in the U.S. will continue to weigh on refiner margins in the near future.
The firm’s latest forecast calls for a Brent-WTI differential of only $4.50/bbl, much lower than the previous forecast of $8/bbl.Khan cuts ratings for HollyFrontier (HFC -0.4%), Western Refining (WNR -1.6%), CVR Refining (CVRR +0.3%), Alon USA Partners (ALDW +2.4%) and Northern Tier Energy (NTI -2.2%) to Neutral from Buy.
The firm maintains its Buy rating on Phillips 66 (PSX -0.5%), Marathon Petroleum (MPC -0.8%) and Valero Energy (VLO -0.6%).
I agree with you, I think the comparison is nonsense. From the headline, I thought they were going to say that both miners (of all minerals, not just coal) and airlines have historically kept expanding capacity, to the point that continually outpaced demand. So you ended up with boom and bust cycles. The airlines supposedly got religion last year when the price of oil tanked and the airlines didn't pass along the savings. Coal miners planned for new mines a few years ago when times were great, and opened those mines in a declining market. So somehow they have to come to terms with reducing supply. That's the comparison I was expecting.
But it's news about coal mining, so I figured I's post it.
Why Coal is Just Like the Airline Industry
OK. Maybe not just like. But JPMorgan’s John Bridges and Anant Inani argue that they see parallels between coal miners–we assume they’re talking about Peabody Energy (BTU), Arch Coal (ACI) and the like–and the recovery in the airline industry post-the Great Recession. They explain:
It’s difficult to think about a coal recovery at present, but we’re intrigued by some of the parallels with the airlines, which have bounced back to record profits. While new technology can substitute for travel and coal usage, there’s still a base load of demand for both. The outlook for coal looks dark now, but coal’s problem in the US is mainly due to the oversupply of shale gas, which has a short investment cycle. We feel it’s too early to predict when the US gas market will balance, but investors may have become too negative…
A few short years ago the airlines were being reorganized and some even went through reorganization twice (sound familiar to coal investors?). Yet the stars finally aligned for the airlines. Like the airlines, the coal companies produce something that (in smaller quantities) is indispensable since it is included in the energy mix for the US power grid even after the greenhouse gas rule is in place.
The health of the coal companies is driven by a number of currently negative drivers. Internationally, the excess mine capacity built for China could hold miners back until later this decade, assuming decent global growth. Yet for the US domestic miners, we feel the biggest problem is not of their making and lie with shale gas…
Given the uncertainty on timing for a tighter coal sector, it’s difficult to position in the coal equities…Some investors are positioning in the underlying assets. Chris Cline has taken a back seat to Bob Murray in Foresight Energy (FELP), yet in his private company he’s purchased the Donkin Mine in Canada’s Nova Scotia, and he also purchased the Coal Spur project in Canada’s Alberta province. Cline purchased ILB coal in the early 2000s before the market recognized that this region would develop to have some of the best US coal fundamentals.
Shares of Arch Coal have gained 1.9% to $3.45 at 3:45 p.m., while Peabody Energy has fallen 2.8% to $23.27, and Foresight Energy has risen 4.7% to $8.65.
You are certainly right that met coal miners rely more on the spot market as their contracted sales drop off. But 2 of NRP's largest met coal lessees (CLF mines about 25 of NRP's coal production, ANR met coal production on NRP properties is not broken out) sold 56% or so of their met coal last year under long term contracts. The number is dropping off, though.
I think (really just a guess) that there's no new met coal sales to be found in the US, so the spot sales are going to Europe. But exports of met coal are dropping just as fast as US met coal sales, so I really don't know what's going on. Sometimes, met coal is sold for use as thermal coal, but the price differential would seem to make that uneconomic.
All I know is that the entire met coal/steel chain is suffering big time and there doesn't seem to be any place to hide.
Not a bad idea, but it needs some tweaking. As an MLP, NRP has no loss carryovers so a sale of its interest in OCI Wyoming (the soda ash operation) would be subject to 35% federal corporate tax plus some state taxes. Corporations don't get any lower tax rate for capital gains, so the full 35% rate would apply. If they were to sell the OCI Wyoming and keep the MLP status, the gain would pass through to the partners, mostly at capital gains rates.
And they would have to actually sell some of their coal or oil & gas properties to establish a tax loss. The properties are presumably not totally worthless, so an actual sale would be needed. (Sort of like people that bought NRP at $ 30 - the fact that it has lost most of its value isn't enough to claim a loss. You need an actual sale to establish the loss).
They could do a sale of some coal or oil properties in the same year that they sold the OCI Wyoming interest and use the loss to offset the gain. But they could do that as an MLP, too. They don't need to incorporate to use that strategy.
But I think the biggest problem with your plan is that NRP is run by coal people and the last thing they want to do is sell coal properties in today's market. Just like oil men, they're always optimistic.
Anyway, that's what I think.
It didn't make me buy either, but getting NRP at $ 2.30 did make me buy a few units this AM. The dollar volume in NRP is so small that just a little trading can drive the price quite a bit. Maybe today's drop (in addition to overall MLP weakness today, what else is new?) is people thinking the distribution will be passed.
Don't get me wrong - NRP started this year above $ 9 and I think there will be one last drop with the tax loss selling season. But $ 2.30 today looks like a decent bet for a short term bounce. But I will have a very short term horizon for holding the units I just bought.
On Friday, OCIR announced a small increase in its distribution. From that I infer that business was at least as good as Q2. So that part of NRP's business should be OK for Q3.
Met coal is used in the blast furnace method of making steel. The met coal is first converted to coke and the coke is used to heat the blast furnaces. Natural gas is used in the electric arc method of making steel. BF is used to make new steel from iron, EAC is generally used to make steel from recycled steel. BF steel is generally considered to be superior strength, etc, but EAC steel is much cheaper to make and it can be used in most applications. For a lot of reasons (some of which I understand, some of which are beyond me) EAC is way, way cheaper than BF. It's not only natural gas versus coal, it's that BFs need to be huge and need to be run constantly and a whole lot of other issues.
US Steel has been talking about significantly reducing its use of BF and switching to EAC. I haven't heard about the other steel makers but I assume they are under the same pressures and have similar plans to switch.
I don't follow the US steel industry at all, so my understanding is limited. But the US steel makers are getting killed. There's less demand in the US (take look at how much aluminum Ford is using in its new trucks), the strong US dollar has killed exports and made imported steel cheaper than the US producers' costs, if they are using BF technology.
In recent years, met coal made up the difference by exporting met coal. But Australia's weak dollar and shipping advantages have taken most of the Asian market for met coal, China's demand is slowing. So there's pain everywhere.
The steel industry has filed unfair pricing claims against imported steel and those complaints are working their way thru the system. But for now, US steel is getting killed and that has killed a lot of met coal miners.
BRW, if you want to bet on the future of BF steel and met coal, take a look at SXCP, an MLP that converts met coal into coke, and which has several long-term, take-or-pay, coke production contracts with US Steel, AK Steel and Arcelor. It yields 15%+
How is this the same news? On Oct 7, it was US Steel temporarily shutting down Granite City steel works. Today it's AK Steel temporarily shutting down its Ashland KY steel making operations.
A few weeks ago, it was US Steel temporarily shutting down its Granite City steel mill. Today, it's AKS temporarily shutting down the blast furnace steel-making part of its Ashland, KY operation.
NRP lessees sell met coal to both US Steel but I don't see any disclosure about their sales to AKS. But things are apparently getting worse, if that's possible, in the met coal area.
I'm sorry, I'm not making myself clear. For detail, read the company's SEC filings.
Everything about the company's financials is confusing right now. NEWT was a regular corporation for most of 2014 and it became a BDC in November of last year and it also became a RIC this year. Because of these changes, the accounting presentation in the financials has changed drastically, making historical comparions impossible.
But basically, the parent company has elected to be taxed as a BDC. As a BDC, it invests its money in certain specified types of businesses or companies. As a BDC, it does not pay income tax on the profits from its own BDC-qualifying businesses. In addition, several of NEWT's subsidiaries that have BDC qualifying income (the ones that make SBA loans) also don't pay income taxes. But any subsidiaries that generate income that does not qualify for BDC status pay their own income taxes, and dividend the after-tax income up to NEWT. As a BDC, NEWT does not pay tax on those dividends.
So I think (1) the BDC status allows NEWt to run certain lending businesses with no income tax, as long as it pays dividends to shareholders of the income. (2) the non-BDC subsidiaries (if any) still pay income tax. There's more, but you'll have to read to get it.
On August 25, Royal energy announced an agreement to buy the old abandoned Gatling mine. From the press release - The Company has paid a $250,000 deposit and the entire transaction is scheduled to close on or before October 5, 2015.
Royal is good at announcing intentions, not so good at announcing completions. It's 10 days late and no announcement of completing the purchase. Actually, no announcements of any kind from Royal since August.
BDCs don't pay income taxes and are required to pay out most of their income as dividends (in order to keep the income tax exemption). It's more complicated than that, but tax savings are the basic motivation.