The company has announced 2 presentations by management at investor conferences later this month. I am slightly hopeful that this is a sign that the Q4 numbers won't be as bad as I'm afraid they will be. We'll see on Wednesday.
I'd love if that were true, but I don't they include White Oak when they refer to "We". If you look at the first footnote in the 10-K (I think the first sentence) they say "We" means ARLP and its consolidated subsidiaries. The White Oak operating partnership is not a consolidated subsidiary. I have heard ARLP management say (most recently on the Q3 2013 earnings call) that White Oak handles its own marketing of coal, and the best ARLP has said is that it is encouraged by White Oak's sales efforts.
So while I hope White Oak has entered into long-term contracts, I don't think the 10-Q language means that. In fact, if you look at Foresight Energy's (another coal MLP that is trying to go public, so they've done a bunch of filings recently with the SEC), Foresight has great production numbers but not much in the way of long-term contracts, which scares me for White Oak.
Still waiting. I don't see any near term catalyst for the price. Right now, I'm looking at a company that will earn $ 1 this year, with inconsistent quarterly results so I expect the stock to drift lower.
If it's any use, this quarter I probably want to buy before the earnings release, assuming the stock drops further before then. The comparison to last year's Q4 should be easy. Even though the company has said Q4 results will be dinged by the PACK acquisition, and they don't expect any orders of that high-margin API in Q4, I think Q4 results will be significantly better than last year.
2. The money NRP borrowed last year was an actual borrowing; NRP owes the $ 300 MM plus interest at 9.125%. The available liquidity that NRP is talking about now is different. Lenders have agreed to lend up to $ 300 MM to NRP's OPCO (its finance subsidiary) if NRP asks for it. So far, NRP OPCO has only borrowed $ 20 MM against this line, leaving $ 280 MM available. Lenders have also agreed to lend up to $ 16 MM to NRP's oil & gas subsidiary; so far, only $ 2 MM of that has been borrowed, leaving $ 14 MM available. So the $ 294 MM available financing that NRP refers to has nothing to do with last year's debt issuance. It would be an additional borrowing, if NRP does in fact borrow it.
1. I post a lot, and then usually forget about it. To be fair, I think I posted at that time that it was hard to track Mr Cline's ownership because of all the different entities he uses to own NRP units. On April 11, when NRP registered the units owned by Mr Cline's family, the total units were 10.5 MM. Mr Cline directly owned 4.917 MM units, and an entity called The Cline Trust Company owned 5.349 MM (and 2 small entities owned 240,000 units. The reg statement certainly seemed to make clear that there was no overlap in these numbers; that is, Mr. Cline himself owned 4.9 MM units, and the Trust Company (basically owned by trusts f/b/o Mr Cline's 4 children) owned another 5.35 MM units. Now the disclosure in the 10-Q only refers to Mr. Cline's 4.917 MM units. The other units could not have been sold in any public transaction - NRP has not traded 5 MM units since April 12 in total, so they could not have been sold publicly. Maybe they were sold privately? Maybe Mr Cline is no longer considered to own the Trust Company units? Maybe I misread the original reg statement? Anything is possible. But whatever he owns at this point, I would have no way of knowing his intentions with respect to those shares.
First, Mr Cline owns 4,917,000 NRP units in total (that includes units he owns directly as well as units held by trusts for the benefit of his family members). At least that is what NRP's 10-Q says. I'm not sure where you got your 10.5 million. As to his intentions with respect to selling those units, I'll ask him the next time we get together.
All the amendments to the S-1 are standard. When a company starts the IPO process, they know it will take months (or in the case of Foresight, several years) to complete the process. So the first S-1 filed will have lots of blanks in it; it's basically a place holder for all the things the company isn't sure about. Then the company gets feedback from its investment bankers, its attorneys and its accountants, all of which will require changes to the S-1. Then, of course, the SEC might have comments or changes, which requires amending the S-1. And before the S-1 can go effective, it must contain up-to-date financial information, so every 3 months, all the financial data in the S-1 must be updated for the most recent quarterly results. That's the part I saw in yesterday's amendment. In Foresight's case, I suspect the major issue is that the investment bankers are trying to figure out if there's a market for a coal MLP right now, and if so, what price can Mr Cline and his co-owners get and what distribution level do they have to offer. For the most part, the only people who pay attention to all the amendments are the people being paid to get the IPO process completed.
And you've got me confused with your question about the debt. NRP has 2 revolving credit facilities ((basically short term lines of credit) and NRP is entitled to borrow another $ 294 MM under these facilities. These facilities have floating interest rates; in Q1, they had interest rates of 1.91% and 1.98%. Very low, but the facilities end in 2016 so they are for short-term borrowings. I don't know where you're getting the 9.5% rate.
I'm usually a long-term holder too, but I learned my lesson with ACET the last time they reported earnings in February. The stock dropped 10%, from $ 20 and a little to just below $ 18. I bought more at that point because I thought ACET was basically a good investment whose price had gotten ahead of the company's performance. I see that in after hours tonight the stock is down 8% (no idea of volume), and I think tomorrow will be ugly. If it gets ugly enough, I'll probably buy back in.
For once it looks like I was right - even a stopped clock is right twice a day.
The Q was much worse than I expected. I expected Pharma Ingredients gross profit to be to be down a lot from last year, but it was also down from last quarter, even those sales in that segment were $ 10 MM higher than last quarter. Human Health was down in sales and gross profit from last year and last quarter, which I didn't expect. And Performance Chemicals had a nice quarter, sort of offsetting Human Health's weakness. Overall, gross profit down $ 6.5 million from last year and down $ 2 million from last quarter. Bottom line - 19 cents EPS, down from last year and down from last quarter. And they had $ 700,000 of "other income" when usually that line is close to zero. No explanation that I could see for it, but the quarter would have been that much worse without it.
Last night after NRP reported, Foresight filed its 7th amendment to its S-1. This one does contain the Q1 numbers. I assume Foresight waited until after NRP released numbers to file this update because someone might figure out how Foresight's Q1 results and disclosures might affect NRP.
A quick look thru the S-1 shows that Foresight is predicting a large increase in coal production between 2014 and 2015. Unfortunately, most of the increase is not from reserves owned by NRP. The increase is from reserves owned by another of Mr Cline's companies.
And again, I can't believe just how many related party transactions Foresight discloses. I'm not as concerned about the transactions with NRP because Mr Cline does not control NRP; he just owns a large minority of the GP. But there are lots of other related party transactions with his other companies. I can't know the ultimate IPO pricing, of course, but unless it's really cheap (which I doubt) I can't see that it would be more attractive than ARLP, however low the coal mining costs might be.
One of the issues is that AXA (the European insurer) owns something like 65% of AB, so the float is pretty small. And because AB doesn't need capital on a regular basis, it doesn't do secondaries like most MLPs do, to raise cash. So most of the investment banks don't bother following it - they can't get any investment banking fees. So there's not much coverage.
And for the past few years, AB has been in the wrong area - lots of fixed income funds when people wanted equities. I think AXA, beyond being the managing partner, is also AB's largest client, and that piece of the business is all fixed income. For the past few years, with interest rates near zero, there has been pressure on AB's fees for managing the fixed income funds.
AB has been trying to focus a bit more on equities, and if interest rates rise, that side of the business should improve. And you're getting paid to wait.
Here’s something to worry about.
In Q1 2013, NRP’s revenue related to the coal royalty business (done my way) consisted of royalties, minimum royalties, override royalties and property taxes passed thru to lessees. The cash expenses related to the royalty business consisted of property taxes, royalty payments, 100% of G&A and 85% interest expense. Some of the G&A should be allocated to the other operations, but not much, and the company gives no information on this so I allocated it all to the royalty business. For interest expense, I simply allocated 15% of total interest expense to the OCIW operation and charged the rest to the royalty business based on the original amount borrowed. And finally, for DCF purposes, I allocated the working capital adjustments to the royalty business.
On this basis, Q1 2013 royalty-related revenues were $ 67,885 and DCF was $ 35,315 (out of total DCF of $ 43,913).
I then did the same computation for Q1 2014 with 1 minor change – I allocated 5% of interest expense to the oil & gas operation because of the new buys. For Q1 2014 I show royalty-related revenues of $ 50,316 and DCF of $ 13,378 (out of total DCF of $ 38,927).
So royalty-related DCF has been cut by 62%. A big piece of this drop is the working capital adjustments, which to be fair, I should ignore because they will reverse at some point. So if I ignore those, royalty-related DCF drops from $ 39,500 to $ 24,500, still a drop of almost 40% for the Q. And this is after NRP basically cut its G&A expenses in half. Actually, it was the stock market that cut G&A – the cut was mostly a reduction in incentive compensation paid to the GP based on the price of NRP’s units. They tanked, so the cost of giving them out as compensation dropped also.
But the miner’s pain is really beginning to be felt by NRP. The pain has long been flet by NRP’s unit holders, but now it#$%$ the bottom line.
Considering how most coal miners are doing these days, anything short of a disaster was a positive for the coal royalty business. And keep in mind that Q1's DCF was reduced by $ 10 MM because of the timing of real estate taxes and employee incentive comp. This happens in Q1 of every year. NRP accrues real estate taxes in all 4 quarters for example, but pays them in Q1. So DCF is understated in Q1 and overstated by the same amount in the other 3 quarters.
And no one disagrees that NRP is going thru a very hard time. The question is whether it will eventually come out of it.
No you won't get the distribution. You bought on May 1, which was the ex date. Ex means without; that is, you bought units without the distribution. You had to buy no later than April 30 to get the May distribution.
Just a few big picture comments in no particular order, if anyone cares:
First, a reminder: Q1 is always the weakest quarter for DCF. That is because throughout the year, NRP accrues amounts for real estate taxes and employee bonuses and pays those amounts in Q1 of the following year. Those payments reduced Q1’s DCF by $ 10 MM. So if you average those amounts out over the course of the year, the Q! DCF would have been about $ 7 MM higher. So Q1 wasn’t as bad as it would appear at first glance.
DCF was $ 5.5 MM lower than in Q1 2013. But the 2014 number includes a $ 11.6 MM distribution from OCI Wyoming, while Q1 2013 had no such distributions. So excluding OCI Wyoming, DCF was down $ 17 MM, or almost 40%. I can’t see where NRP discloses the net cash flow from the new oil & gas properties (revenues were up a lot, but there had to be expenses), so DCF from coal really tanked this Q. So congratulations to NRP’s management for buying OCI Wyoming and the oil & gas properties, but the coal business is really tanking.
Coincidently, earnings and DCF were reduced by $ 5.5 MM in Q1 (versus same quarter 2013) by the higher interest expense on the 9% debt issued last September. This is not a surprise to those of us at the time that wondered why NRP would issue such high cost debt rather than cutting the distribution for a few years and/or using cash on hand to pay down the old debt. $ 5.5 MM extra interest represents 5 cents in quarterly distributions, and unit holder will be living with that hit for years.
APC has made a formal demand of NRP for payment of the contingent portion of the OCI Wyoming purchase price. The amount could be as much as the present value of $ 50 MM. NRP has accrued $ 5 MM as a current liability and $ 10 MM as a noncurrent liability and thinks APC is wrong about accelerating the entire contingent amount. However it also says that if it has to pay APC now, it will borrow the money.
James River Coal is a small lessee in bankruptcy. NRP says it has $ 35 MM of reserves leased to JRCC and it’s too early to tell if the leases will be accepted or rejected. The number is small, but NRP warns there may be a write-down if JRCC rejects the leases. NRP also mentions that some lessees in CAPP, NAPP and IB have moved their operations off NRP’s properties and onto adjacent properties not owned by NRP. In 1 case, NRP says this happened in the ordinary course of mining; in the others, NRP doesn’t make that statement. I don’t know if I should read anything into the silence, but I wouldn’t count on production picking up in the near future. I have to say that I’m surprised there haven’t been any impairment charges for the CAPP coal reserves so far, but to be fair, the impairment tests are fairly easy to pass.
NRP repaid $ 41 MM of debt in Q1, but the money came from cash on hand, not from operations. As you might expect, NRP paid down pieces of its higher cost debt; however it is not allowed to pay down any of the 9% senior debt issued last September. NRP has another $ 40 MM of principal payments coming due during the rest of 2014, and hopefully DCF will cover those payments or the company will have to refinance them. NRP only has $ 54 MM of cash on hand at this point. BTW, it’s cute that NRP management states in the 10-Q that the debt repayment funds came from operations and the sale of units. So I guess they are saying indirectly that the distribution is not coming from operations? I prefer to match up the distributions with cash flow.
NRP has been issuing units using an ATM program. Thru May 7, NRP has sold 560K units for $ 9.1 MM, for an average price of $ 16.20. The majority of these sales took place in Q1 but they are continuing. Clearly, $ 16 is an acceptable price to NRP management.
OCI Wyoming is going to close for a while in Q2 for maintenance, and OCIR says the Q2 numbers will be dinged slightly for this. So NRP’s earnings from OCI Wyoming should be a little bit lower than in Q1. On the other hand, NRP received a $ 13.9 MM distribution from OCI Wyoming in April so cash flow in Q2 should be up nicely on that score.
The met coal royalty rate was $ 4.95/ton for the Q, up from $ 4.81 in Q4 but otherwise the lowest met coal royalty rate in all the years I’ve been tracking it for NRP. Met coal production was 3,431 tons, which is lower than any other quarter in at least 4 years. And NRP thinks it’s going to get worse – “We do not anticipate metallurgical coal prices recovering in 2014, and it is likely that one or more of our lessees will reduce production of metallurgical coal from our properties as long as prices remain at current levels.”
The thermal coal royalty rate was $ 3.01/ton for Q1 which again is the lowest rate in years. Last summer, the rate dropped to $ 3.25 for 2 quarters, but up until Q4 2012 we were looking at a $ 4.50/ton rate for thermal. This is skewed by the 1 old lease in NAPP with a royalty rate around $ 1/ton. Now that I think of it, if I remember my algebra, NRP has given us enough information to solve for the quarterly production at that mine.
There’s more, but why bother? Coal is tanking; NRP sees a possibility of thermal coal pricing and demand may recover, but it thinks met coal will get worse. And now it sounds like the met coal problem is snowballing – first prices dropped, which hurt the royalty rate. Then because of lower prices, miners may stop mining, which hurts NRP even more.
OCI Wyoming seems to be doing well, but if you think it’s a good investment, buy OCIR - it doesn’t have the coal baggage, and it yields about the same as NRP. I bought some. That’s a ringing endorsement, right?
And if you like oil & gas, there are 3 or 4 MLP producers yielding around 10%.
So no major surprises and no blow-ups. And no much reason that I can see to buy NRP just yet.
I just noticed that NRP also filed its 10-Q tonight. If you look at footnote 4, you will see all the detail about NRP's share of things at OCI Wyoming. The difference between NRP's reported share of income and 49% of OCI Wyoming's GAAP income is amortization of purchase price.
I don't see that. OCIR consolidates OCI Wyoming (with a carve out at the bottom of the income statement for NRP's interest) and they show $ 116.2 MM of sales and $ 21.6 MM of GAAP net income, and something like $ 26.3 MM for DCF. Actually, when it comes to DCF, OCIR only shows its own piece, so I had to gross that up to get to OCI Wyoming's total.
NRP shows $ 9.779 of GAAP net income and DCF of $ 11.645 MM from OCI Wyoming, which basically is their 49% share. I think that NRP is amortizing some of its purchase price of the OCI Wyoming interest, which is why GAAP net income is less than 49% of the total.
So unless I'm missing what you're seeing, NRP seems to be picking up its 49% share, which is correct.
But there's a few interesting things in the release, some of which may be explained when NRP files its 10-Q. I really wish NRP did earnings calls; it would make life much easier than just guessing about things, which is what I end up doing.
OCIR owns 51% of OCI Wyoming and NRP owns the rest. OCIR had a good quarter - most importantly, OCIR had income of $ 10.3 MM and DCF of $ 13.1 MM so NRP's share should also be somewhere around $ 10 MM for GAAP income, and $ 13 MM for DCF. NRP only reports the DCF when OCI Wyoming distributes it to NRP, so there may be some delay in reporting the number but it was a very good quarter for NRP whatever the accounting is.
In Q1 of last year NRP had zero cash flow from OCI Wyoming because there was no distribution in the Q. I think NRP's share of OCI Wyoming's GAAP income was around $ 7 MM. So Q1 this year was much better all around.
They have been releasing the report piecemeal for the past month but today the complete report is out. They have slashed their projections of thermal coal [production in CAPP over the next few years. Actual thermal coal production in CAPP was 79 MM tons in 2013, and the same amount is expected for 2014. Then the drops start coming fast, with production in the 40 MM tons range by 2016. This is higher than Foresight Energy's S-1 showed, but really low nonetheless.
CAPP met coal production is projected to be pretty stable, at about 50 MM - 55 MM tons per year, going out at least to 2018. I don't see that they project met coal pricing by region, but the overall projected CAPP pricing (thermal and met together) is projected to be flat for the next few years. Since we're in a bit of a trough for met coal pricing currently, this isn't a good sign.
And since more than half of NRP's reserves are in CAPP, none of this is bullish for NRP's current operations. NRP really needs Foresight to ramp up production in Illinois Basin. Or diversify away from coal more quickly.
Not that anyone cares (or should care, my track record for timing is pretty bad). But I think earnings will disappoint just a little bit. Q3 last year benefited from the highest sales of pharma ingredients in the company's history ($ 60 MM vs an average of about $ 41 MM the last 3 quarters) and the company said it didn't expect any sales of those high-margin API's in the second half.
I don't know who the 2 analysts are that Yahoo cites, but they are looking for a flat quarter EPS compared to last year. The company might well hit that number but I don't see much better.
Of course, since the company doesn't talk a whole lot, the number could be great or terrible. I don't expect either, just flat with last year.
I don't think there will be much confusion in the Q's numbers from the Pack purchase because it closed after the quarter end.
We'll see soon enough.