I missed this story when it first came out. Or at least I don't remember posting about it on this board.
CLF was NRP's biggest met coal lessee. On December 22, CLF sold its 2 mines (both leased from NRP) to Seneca Coal, basically just to take the realted liabilities off CLF's books. No cash changed hands in the deal. CLF stands to receive up to $ 50 MM in the future if the mines meet certain hurdles.
The good news for NRP is that Seneca intends to continue operating the mines. The news is unclear on this point - it says Seneca plans on producing 4.4 MM tons of met coal in 2016, but it also talks about Seneca "re-balancing" the production among its various mines, so I'm not sure of the production that will come from these 2 mines. 2014 production at the 2 mines was 4.8 MM tons.
Just a strange kicker - the story refers to Seneca as "Seneca Coal Resources LLC, an affiliate of ERP Compliant Fuels LLC, the Virginia-based environmental group". Environmental group? Not sure of that. Later in the story they say ERP is actively marketing the sale of ‘Compliant Fuel,’ which bundles reforestation carbon credits with coal sales to reduce the rate of growth in atmospheric carbon dioxide,” according to the PR Newswire report. “
If you have a few hours to waste, try to reconcile how many NEWT shares Barry Sloane owns. It doesn't really matter, but I always try to track insider buys and sells in companies that I invest in.
Last May in the proxy, the company stated that Barry owned 1,000,356 shares. From the disclosure, it looked like these were all "owned" shares, not options that he might or might not exercise.
This tied into his Form 4 filings until August, when suddenly without a filing that I can find, his shares dropped to 933,143. His subsequent filings worked off this lower number and he apparently gifted shares to his children but still showed them as being indirectly owned by Barry, and his total shares owned grew to 963,000. Fine. Then he did a Form 4 filing that showed he received 116,456 shares in the special dividend, but his total shares owned did not change. Then he also did a 13D filing that showed he owns 963,000 shares. So either this is another example of the company not knowing or caring about proper disclosure, or else Barry sold the 116,456 special dividend shares and didn't tell anyone.
I assume the stock price will recover if the company pays the $ 1.50 dividend this year. When it does, I'm gone. I'm willing to cut small companies some slack on their disclosures, but NEWT is in a class all its own.
BTW, they reported similar to ARLP. Production down in Q4 due to warm weather, resulting in customer deferrals. Their projected tons sold for 2016 is just about what they have already contracted - they have contracts for 4.8 MM tons, and their projected sales for 2016 are between 4.4 MM and 5.2 MM tons because they're concerned that some of their contracted tons may get pushed out. Cutting back on costs, no surprise.
CNXC by itself is very small because it only owns 20% of CNX's thermal coal operations. So on an overall basis, the operation is just a little smaller than ARLP. And all NAPP.
I'm not recommending it; I bought a few CNXC units in anticipation of their maintaining the distribution. They did maintain the distribution, I got a little pop and now I'm getting out. It's really illiquid. But they are reinforcing what ARLP said.
SXCP is an MLP that mostly processes met coal into coke. They reported Q4 earnings today and 1 point could be relevant to NRP. SXCP repurchased $ 46 MM of its debt at a $ 10 MM discount and recorded a $ 10 MM gain on the repurchase.
I din't recommend SXCP; I'm just pointing out that some companies are able to repurchase their debt at a discount. I have no idea if NRP will do the same, but it's clear that other MLPs are doing this.
I think there's 1 items you're missing.
You pick up the 1.8 MM shares issued in the special dividend but you don't pick up any related book value. I think you should be adding $ 25 MM to equity, bring the NAV to slightly over $ 13 per share.
As you pointed out, when NEWT declared the special, they reduced equity for the $ 34 MM they were required to pay out (that's the $ 2.69 per share amount). But NEWT only paid cash of $ 9.2 MM for the special - the rest of the dividend was funded by the 1.8 MM shares that were issued. So $ 25 MM of the amount they accrued for the dividend should be added back to equity. That raises the per share NAV to a little over $ 13.
I think the company said this in one of their presentations as a hypothetical because at that time, they were not sure what percentage of the special would be paid in cash or stock. But frankly, the company's disclosures over the BDC changeover have been very confusing.
One of the problems that NEWT has to address is that its business model does not fit the traditional BDC format. All of NEWT's net income comes from securitizing the SBA loans, and this gain does not show up in "net investment income" on the income statement - it shows up below that line. So if you look at the Seeking Alpha or Investor Village sites, the BDC investors won't even look at NEWT because the dividend isn't being funded by NII and they think the dividend can't be maintained. It doesn't help to point out that NEWT's business model is similar to mortgage REITs that used "gain on sale" accounting because those mREITs generally turned into disasters.
That reduction is for 1 quarter. Almost a dollar drop in the distribution on an annual basis. The price reaction doesn't seem so crazy.
I can't see the post-split units dropping that far. Look, everything about coal is ugly right now. But as the property owner, NRP will get some amount of royalties. And the Ciner operation is doing well - CINR just went ex today, so I assume that NRP has already received its cash distribution for Q4 of about $ 11 MM and the future of that operation is OK. The aggregates business, I believe, does not rely on the oil & gas business for any significant portion of its sales. It will suffer in a recession, but otherwise should do OK. I think NRP overpaid for VantaCore but its still has value. The oil & gas properties aren't worth much but they should produce a few dollars of income.
In 2015, the coal royalties should have produced something in the area of $ 150 MM of gross income, with very low direct cash expenses against that income. 2016 looks like a bigger disaster for coal, based on what ARLP and CNX has said and the royalties have been dropping around 20% per year. So maybe 2016 is $ 125 MM or maybe as low #$%$ 110 MM - I think it depends on FELP's mines. There will be cash flow to help with the interest payments,
But as bad as things look, the big issue for NRP is whether it can repay or refinance its debt over the next 2-3 years and avoid triggering any covenant defaults along the way. Maybe, maybe not. But I think they have some more time than you're giving them credit for.
Don't get me wrong - I wouldn't buy NRP at this time. Every reverse split I've been involved in has turned out badly (except for reverse splits associated with spin offs). So I think NRP's price will drop as more people give up the ghost. But I can't see the $ 1 range for a while.
Might be interesting to compare 2016 projections with ARLP. I think they will say the same thing ARLP did.
CNXC is NAPP exclusively. They cut projected 2016 production a few weeks ago and it sounded starnge, but it fits in with what ARLP said. CNXC has 4.8 MM tons contracted and sold for 2016, but their guidance is for sales between 4.4 MM and 5.2 MM tons. Apparently they have the same problems with customer deferrals of deliveries that ARLP has.
Also when they made that announcement, they said things got worse in December, with the warm weather.
I do not recommend buying CNXC; it's just interesting to look for comparisons. And CNXC is pretty strong, for a coal miner. I might buy a few units as a gamble before the announcement for a very short term trade. The units yield about 28%. Half the units are subordinated so they suffer any cut first, so I'm pretty sure they can cover the public units distribution with DCF to spare. Since CNXC recently IPO'd, I suspect they won't want to cut the distribution on the public units yet. Also Greenlight Capital, which owns half of the publicly-traded units, probably won't be too happy with a cut just yet. Mr. Einhorn has already taken a lot of grief for his involvement in CNX and CNXC.
Assume ARLP maintains its distribution during 2016. If you buy today, you will get 20% of your purchase price back through distributions. But what about the other 80% of your price? You're looking at a company with great management in absolutely horrible operating conditions. What expectations can anyone have for 2017 and beyond? Besides the competition with natural gas, we have no idea who will be the next president and whether the administrative burdens on coal-fired power plants will be loosened.
Investing is all about probabilities and determining if you are being adequately compensated for the risks you are taking. I just don't see that today's price and yield justify the known risks.
I have owned ARLP for years, selling most of it in the fall of 2015, and the last of it this year. I bought back in last Thursday and added yesterday, so I cut my losses a little. But as much as I admire management, and as much as I think they will maintain the distribution for the next few quarters at least, I can't see sticking around. Maybe today, maybe I'll convince myself to stay long enough to get the distribution, but I can't see sticking around long term.
ARLP said that US coal production for 2015 was 900 MM tons, as low as it has been since 1986. The Q4 run rate for coal production would result in 828 MM tons for 2016. They are projecting production cuts in all basins. Lower production and lower prices means less royalty income for NRP. It will be interesting to see NRP's guidance in that regard when they report.
7. What are the returns they expect to see in the oil investments? No number was given. They bought into the land and are waiting for drillers to start production. But costs of the land have dropped along with oil prices. Mr. Craft added that they see better returns in coal, which surprised me a lot.
8. Status of contracting for 2017 - they expect to see new contracts in the first half of 2016. The open issue is this - utilities are sitting on lots of coal inventory already (warm winter so far, not counting this past week - my comment, not theirs). ARLP doesn't know if the utilities will burn their inventory, or will buy more coal because prices are lower.
9. Call from Chris, private investor - yield is 23 -27% between ARLP and AHGP. Other companies have cut the distribution simply because the cost of equity capital was too high. ARLP says they don't need to access the equity markets so this doesn't affect them. No assurances, but also they didn't indicate a need to cut the distribution.
10. Debt costs are going up but ARLP doesn't have any near-term maturities. ARLP will revisit this in the 2017/2018 time frame when maturities roll over.
Overall (my comment, not theirs) I think they're good on 2016 revenue - they have 34.4 MM tons contracted and they are projecting sales of between 34 MM and 38 MM tons. Pretty conservative. They're probably good on costs as well, except for surprises, which are always bad. Cap ex projections are way down. If the coverage ratio stays at 1.2X or higher, I think the distribution should be safe. As the ratio drops to 1.1X, I thinka cut is certain. I think they are just buying time to see how long the terrible coal market lasts.
1. No assurances on the 2016 distribution. It will be evaluated quarterly. This statement was not a surprise, but I expected them to add that they currently don't expect to cut. They didn't add this.
2. They will consider coal-related acquisitions if the price is right. Again, this is boilerplate, but I really didn't want to hear it. 1 comment from Mr. Craft in response to a later question was interesting, though - he said that ARLP has only made 1 acquisition for shares of ARLP in its history. It was long ago and he regretted it. So my guess is that they would only buy coal assets at rock bottom prices and only if there were contracted sales associated with the deal. They didn't say this, though.
3. Since Q3, they have contracted for 6.5 MM tons of IB coal at $ 41.90. through 2019. Near-term deliveries on those contracts have lower prices, with increases in later years. No specifics, but current pricing is something like $ 40. The numbers for NAPP were a bit lower, but similar idea.
4. Effect of Federal moratorium on new coal leases on Federal land - Mr. Craft says this was political since it does not apply to oil & gas. But if the moratorium continues past 2016, it would help eastern coal which isn't on Federal land. Mt comment - long shot.
5. Production guidance for 2016 down 15% from 2015. They think IB production overall wikll be down to 110 MM tons in 2016.
6. Interesting and important - Cash costs of mining are projected to be flat with 2015, which means they are expected to be higher than Q4 2015. Why? Lower production volumes - fixed costs will be spread over lower production, raising the per-ton cost. Also the 2016 costs include costs for maintaining the closed mines in "hot idle" status so that production can be resumed if appropriate. My guess is that no one expects production to be resumed at those mines, but there's some additional costs with no offsetting income.
1 more post to finish.
Depends on what they say on the call. I would think that maintaining the distribution should be worth $ 2 at least today, but they are lowering the distribution coverage for 2016, which will hurt. On the Q3 call, I think they said that the low end of distribution coverage for 2016 would be 1.2X. Now the range is 1.1X - 1.2X. So last quarter's floor has now become the ceiling. That's not surprising, but it also will hurt today. We'll have to wait and see.
Net GAAP income - $ 21 MM, after 1-time non cash items.
$ 35 MM gets allocated to the IDRs, so there is a loss of $ 14 MM allocated to the LPs, or 19 cents per unit. Like I said, ARLP's accounting for the IDRs shifts more loss to the LPs.
Includes 1-time items: mine closings - $ 89 MM
Accounting gain on acquisition of WOR/Hamilton - $ 22 MM
So before those items, net income would have been $ 88 MM. Subtract $ 35 MM for the IDRs, and you get $ 53 MM allocated to the LPs, or 72 cents per unit.
Production and sales tons down slightly from last year and from Q3. Pricing pretty flat with Q3 but down $ 3 from last year.
Sales down $ 48 MM
Cost of sales down $ 28 MM
Depreciation expense up $ 20 MM
DCF $ 131 MM, down just a few million from Q4 2014 and Q3 2015.
Yahoo acting strange.
I finally remembered what I was looking for. In 2013, ARLP closed its Pontiki mine after several problems. They took a $ 19 MM writedown for the coal reserves, and because most of the Pontiki mine employees were shifted to another mine, they had no other material charges. So maybe that gives some idea of what the new mine closings might cost tomorrow AM.
I'm scared about focusing on GAAP EPS. I have absolutely no idea what sort of accruals ARLP will have to make for the mine closings and the other items we have been posting about. Could be huge, could be small, so GAAP EPS could be almost anything.
78 cents EPS would be $ 58 MM. Add in the $ 36 MM of earnings that will get allocated to AHGP and the $ 2 MM or so of GP unit EPS, and we're talking about $ 96 MM of net income. I think that's high, even ignoring the 1-time expenses, and it's certainly more than I'm expecting on a GAAP basis. But I can hope.
Some things I am certain about - ignoring special charges, ARLP will make more net income than the entire rest of the coal mining industry in Q4. ARLP will be the only coal miner to make any net income in Q4 or 2015 as a whole. And I think ARLP/AHGP combined will pay distributions that are greater than the rest of the industry combined.