Don't have an opinion on the Q1 numbers yet but I have 1 data point for you and it's ugly. Whiting Petroleum (NRP's partner and the operator of the oil properties) released Q1 numbers yesterday. In Q4, Whiting reported revenue per BOE of $ 60, basically the same as NRP. In Q1, the average realized price dropped to $ 38 per BOE. Whiting increased production by about 25% in Q1 vs Q4, so there was an offset. Hopefully, NRP shared in the increased production because the $ 22 per BOE drop will hurt. I'm guessing the GAAP depletion charge won't drop a whole lot, so NRP's Q1 GAAP numbers from oil should be a good deal lower than Q4. DCF from oil should also drop but not by as much.
The question is who do they think ARLP will outperform - the rest of the coal miners, or the market in general. ARLP could outperform the rest of the miners by taking longer to die (poor joke about coal mining stocks). I hope that Cowen thinks the outperformance is more than that.
As you probably know by now, ANR actually lost 79 cents per share from operations, just about what was expected. ANR booked a profit by buying back a bunch of its debt at 60 cents on the dollar; this resulted in a $ 365 MM reduction in debt and a similar amount of gain. That caused the GAAP profit.
In late 2014, ANR closed part of a mine that is leased from NRP. This year, ANR closed another few mines but I can't tell if any of them are NRP properties. Since I don't own ANR or NRP, I'm not interested enough to find out if any of the properties belong to NRP.
Even ARLP, my only coal mining investment, is having problems in this environment. They were profitable enough - probably the only profitable miner left (plus maybe FELP, which reports next week) - but they had nothing remotely good to say on their call. Spot prices are tanking, and ANR even says that contract prices for 2016 are dropping to the mid $ 40s. Each miner has different prices because of location and quality, but the news just keeps getting uglier.
But everyone already knew that. The question is whether we can outlast the downturn. The other question is whether the next president will be any different for coal.
They don't see any relief from exports over the next 2 or 3 years. They don't see any relief from greater utility demand for coal especially with the current president. Relief can only come from higher natural gas prices.
They think production and demand in the Illinois Basin and Northern APP are largely in balance; maybe there's 5 MM tons too much production. CAPP production has to drop by 20 MM tons to be in balance.
Distribution growth will have to be reconsidered if IB coal prices stay where they are for a continued time (duh!).
Is ARLP willing to do a big M&A deal - they will consider everything but they don't see any opportunities at present. Later when someone asked again about consolidation in the industry, they pointed out that the obvious consolidators (the big producers) have way too much debt, making deals harder.
No great surprises, but no one asked about the status of the customer trying to break the contract.
2 topics that were raised by analysts several times on the call - the Murray/FELP deal and whether ARLP and AHGP should combine.
Mr. Craft had a throwaway comment that I thought was interesting. He said that bringing Murray into FELP "might bring some discipline" to the business. Sort of a slap at Chris Cline, I would think. Why did Chris Cline (mostly) sell out ? Mr. Craft doesn't know, but he said that at one time, the Illinois Basin could grow to a 200 MM tons/year area and people don't think that any longer, so maybe Mr. Cline wanted to take some chips off the table.
Why keep ARLP/AHGP separate? Flexibility - maybe do financing at the AHGP level (the Murray deal did that) or maybe grow AHGP in other non-coal areas, like midstream. I thought the answers were nonsense, but Mr. Craft controls the GP so he calls the shots. I would guess the real reason is price - Mr. Craft's ownership is mostly in AHGP, and there isn't any significant premium to AHGP's price just now, so why should he do any combination if he's not dealing from a position of strength?
Other comments - Spot prices in both IB and NAPP dropped 10-15% (my question - I assume that's from Q4 pricing, but they were not specific). No surprise there.
They hope that fewer rigs will lead to lower natural gas production which could lead to higher natural gas prices (to the $ 4 range) by the 2016/2017 time frame. (my comment - if natural gas stays at $ 2.50 for another year, the devastation we have already seen in coal will look like a walk in the park compared to what things will look like.) Why hasn't production dropped yet? Because producers have hedges that make production profitable. Wait until the hedges run off before you will see production declines.
More in the next post.
To say ARLP's performance was better than the rest of the coal industry is faint praise, indeed.
I'm happy with the distribution increase. I'd have been satisfied if they held it flat. I recently watched (from the sidelines, fortunately) as NRP cut its distribution 75% after cutting it 36% a year ago. So anything other than a cut is good news to me.
Because of ARLP's contract situation, the Q1 sales, EBITDA etc were pretty much fixed from the start. They could have been better if not for the weather-related problems, but that would just have been icing on the cake.
There is a downside to the results, though. It appears ARLP did not contract to sell a single additional ton of coal in the Q. The contracted amounts look to be identical to the amounts at December 31. On the other hand, that indicates that no other customer is trying to break its contracts with ARLP. Last Q, when ARLP disclosed the contract dispute, they removed that customer's sales totals from the contracted sales amounts. So since the contracted amounts are the same as in December, I assume that means no one else is trying to break its contract. In today's coal market, that counts as good news.
A year ago with the Q1 2014 earnings release, ARLP announced that it had contracted for 29 MM tons in 2015. Today, they say that have 28.9 MM tons contracted for 2016. So I guess they will contract for the rest of their 2016 production as 2015 progresses. They may to cut production again to match up better with sales. But ARLP/AHGP looks like the only definite survivor in coal-land. Maybe FELP, too, but its contract situation is scary and I don't know anything about Murray.
Considering the environment, a really good quarter at first glance. I'll have to read more and listen to tomorrow's call. I didn't see anything about the contract dispute or whether any other customers were trying to break their contracts.
Let's see what management has to say tomorrow. In the meantime, like you, I sure hope this is a bottom.
I think Q1 will be OK, but it's the commentary about the business, the next few years and White Oak that matters. I wonder if they've sold any new coal since December.
I can't see any of the commentary being at all positive, but right now the units are trading like it's the end of coal. Mostly, I hope they don't say anything about being interested in buying more coal assets because of the downturn.
No idea. But as any accountant can tell you, "cost" can mean lots of things - direct cost, fully loaded, by-product, whatever. But is a question that relates to NRP?
Looks like the Comcast/Time Warner deal might be DOA. That's the news, but Comcast is up, TWC is up, CVC is up and I haven't looked at Charter. I don't understand it all, but I'll take CVC's move up.
As to oil & gas investments, I'd prefer that ARLP stick to the business it knows best. If I want oil & gas, I'd rather buy a pure-play oil & gas operator.
And considering the size of ARLp, they would have to make a pretty big jump into oil & gas to make a difference to the company's results. $ 50 million is too small an investment to matter.
ARLP does not disclose anything they call FCF. My DCF number comes from the Q4 earnings release, towards the end of the release, and the distribution number comes from the cash flow statement. That number includes the IDR payments because the DCF number is gross of the IDR payments as well. If I've made a mistake, let me know. I try to track the numbers each quarter and if I'm picking up something wrong, I'd like to change my numbers.
from a long-term holder.
Prior to the fall of 2011, NRP had IDRs outstanding. I assume people on this board are familiar with IDRs - the holder essentially gets bonus payments every time the distribution exceeds stated hurdle rates. So the IDRs are a leveraged bet on the success of the MLP - if the MLP does well and increases its distributions, the IDR holder shares disproportionately in the increases. And if the MLP doesn't do so well and has to cut its distribution, the IDR holder suffers disproportionately.
In the fall of 2011 with no unit holder vote, NRP redeemed its IDRs by issuing the holders 32 million NRP units. Quite a few MLPs did similar transactions, but most (maybe all, for all I know) did it through a unit holder vote so that the public holders had a say in the exchange price paid. PVR is a good example of that.
2 things happened then - first, NRP stopped increasing the distribution. It added 1 cent to the distribution in November 2011, kept it flat until November 2013 when it cut it 20 cents and now we all know what happened to the distribution yesterday. If the IDRs were still in existence, the GP and its affiliates would have borne a disproportionate part of the cut. Now no one knew exactly what was going to happen to coal in late 2011, but the signs of problems were already apparent. Like I said, they had 1 last distribution raise after the IDR redemption and then nothing but bad news.
And the 32 million units that were issued for the iDR redemption? Most of them got sold by the GP affiliates (MR. Cline, mostly) in the $ 30s.
That was my first introduction to what I think was NRP's management's lack of integrity. Doing a deal of that magnitude without a unit holder vote was a disgrace. Not that it hasn't happened before in MLP-land - look at some of the Kinder Morgan deals. But NRP acted no better than the bare legal minimum.
I have not owned NRP for the past 2 years, except for 2 extremely short-term and wrong bets that cost me a few dollars. But before that I owned NRP since shortly after its original IPO. So I have followed NRP forever, and I would like to add some perspective on why I have been so negative on the company recently.
Basically, the company tries to put a good spin on every piece of news it releases, without regard to whether the spin is true or not.
Back when the company was being honest with its unit holders, it reported DCF after deducting scheduled debt principal payments - not payments on the revolver which bounces all over the place, but just scheduled principal payments on the senior debt and notes. This gave us an honest look at the DCF that was available to pay distributions. The company maintained this policy through 2012.
Starting in 2013, the company stopped this, and began to report DCF without regard to any debt repayments that came due. At the time, the company said: “We have historically reduced our DCF by the amount of cash we have reserved for principal payments due on our senior notes in the next calendar year. However, to present our DCF more in line with MLP practice and because we intend to refinance some or all of the principal payments that are due in 2013 and 2014, we are no longer going to reduce DCF by reserves for future principal payments. This change in our reporting of DCF does not change our long-term intention to pay down our debt,” said Carter.
The reference to MLP practice was nonsense and misleading. I can do a separate post on that. But the second reason - it intended to refinance its debt as it came due, so there was no need to reduce DCF for this item - well that reason lasted about 9 months, and then NRP started talking about paying down debt again. If NRP had continued to report DCF consistently, more investors would have realized the real coverage ratio was about 50%.
C'mon, our discussions never end. You can't run a business like NRPs without keeping cash on hand. But that's splitting hairs.
In 2012 DCF was $ 328 MM.
In 2013 DCF was $ 310 MM.
In 2014, DCF was $ 217 MM.
The company projects 2015 DCF to be $ 175 MM - $ 200 MM, and I think today they were guiding to the lower end of that range.
The unusual item in this list is 2013. You may recall that when NRP bought into OCI Wyoming, it played games to make DCF look better than it was - OCI Wyoming borrowed money to make a restructuring distribution to NRP and the other owner, and NRP tried to make us believe that borrowed money could be DCF. Absent that bit of nonsense, 2013's DCF would have been around $ 260 MM or $ 270 MM.
So the trend is clear with respect to coal - it was really ugly, and the purchase of OCI Wyoming couldn't completely disguise the problems but it hid them a little. Basically, OCI Wyoming was the best deal NRP has made in probably 10 years.
So in 2014 coal continued its slide. OCI Wyoming continued to do well; the VantaCore deal doesn't look big enough to make a difference; and the Kaiser-Francis oil deal has been a disaster.
You indicated your belief that coal won't improve until mines close; you aren't optimistic about oil prices (neither am I for the rest of 2015, but I'd bet on oil recovery before I'd bet on coal). So what makes you think NRP will stabilize its DCF? If 2015 comes in at $ 175 MM, I'd guess we're looking at some continuing drop in the next 2 years. Throw in the $ 45 MM a year that's needed for the new distribution. Throw in higher interest rates offsetting lower debt balances. And I don't think NRP has the money to fund the planned debt repayment without a sale of assets.
NRP doesn't do earnings calls and I'm guessing this would be an ugly time to start. But how can anyone trust mgt's statements? I'm betting that you can buy NRP in the $ 4s in a week or 2. Some owners probably haven't even seen today's price yet.
Sorry, this board is a bit busy today and I can't find my way through the messages.
2 things - guidance was $ 175 MM - $ 200 MM; that's true. But I think NRP is guiding to the lower end of the range with this morning's announcement. I think they went ot 9 cents/Q as opposed to a round 10 cents/Q because at 9 cents they could say coverage was 4X. I suspect they couldn't say that at a dime distribution.
More importantly, NRP has played games with its definition of DCF so that it doesn't mean what any other MLP means by the term. At least as far as I know. You and I have had this conversation many times, about NRP's decision to exclude debt repayments from the DCF calculation.
Most importantly, NRP doesn't reduce DCF by any fixed asset additions, not maintenance cap ex or anything else. The oil & gas investment, for example, requires NRP to contribute to the costs of new wells. I hope there are new wells, or else NRP's investment is worth less than I thought. So some of the $ 175 MM DCF needs to go to fund its share of the new wells costs. Same thing with VantaCore - it's NRP's only wholly-owned operating business, and as such it will spend money on fixed assets. And I have to assume that NRP itself spends a few dollars here and there on its own business. So some of the DCF can't go towards debt repayment because the company needs to spend money on operations.
I'm probably splitting hairs. NRP's problem is that it tried to ignore, and make unit holders ignore, that debt needs to be repaid. Now they are finally acknowledging that simple fact.
1 last point - NRP currently has $ 400 MM of short-term debt that carries 2% interest, including the $ 300 MM they extended today (only $ 200 MM is outstanding). They didn't say what the rate was on the new debt. But I suspect that some of the DCF will be needed to pay higher interest rates and bank fees. But why would NRP bother to tell the unit holders?
You raise a good point. At 12/31/14, total debt was $ 1.474 billion. They intend to pay this down by $ 500 MM by the end of 2017. If they are successful in that, debt would be $ 1 billion, roughly. A 3.5 ratio would mean adjusted EBITDA of $ 285 MM. Adjusted EBITDA in 2014 was $ 300 MM. But coal is in a secular decline, especially met coal which NRP relies heavily on. So I don't think adjusted EBITDA for 2017 or 2018 will reach $ 285 MM, without acquisitions. And acquisitions mean debt since NRP can't issue equity at today's price. So I don't see them getting to 3.5 X without a sale of some assets (like OCI Wyoming).
And with DCF running at $ 175 MM per year, I also don't see how they intend to repay $ 500 MM of debt in 2 years.
I don't like seeing anyone lose large amounts of money. But if it's any consolation, Mr. Robertson has lost more than anyone else. I did a calculation a few months ago, and at that time he had lost more than $ 500 MM over the past few years on NRP. Today, even the million units he bought last November at $ 12 have lost half their value. Anyone consoled? I didn't think so. I also don't think the people at NRP intentionally lied; my guess is that at Mr. Robertson's age (70-something) he has lived through many ups and downs in the coal and energy markets and figured he could outlast the downturn. But coal is living through a perfect storm - flat electricity demand, overproduction of coal that can't be turned off, incredibly low natural gas prices, strong US dollar killing exports. Even if Mitt Romney had been elected, he might have slowed down the EPA problems, but the other factors would still be here.
I don't own NRP (pure luck - I meant to buy some as a gamble yesterday because I thought today's announcement wouldn't be this bad, but I got involved with work and missed the market's close) but I do own ARLP/AHGP, which is basically the last profitable major coal miner and I'm trying to convince myself to sell some.
First, the good news - In 2014, ARLP's DCF was $ 547 MM, after deducting $ 240 MM for maintenance cap ex. Total distributions, including the IDR payments, were $ 317 MM. So the coverage ratio was better than just about any other MLP I know of.
ARLP is about 90% - 95% contracted for this year's production and maybe 70% contracted for 2016 so things look good on that score.
ARLP has been making other investments beyond the maintenance cap expenditures over the past few years, to build out new mines and to fund White Oak. The White Oak funding requirements are just about done so that should at the very least stop being a cash drain, and probably should start producing some cash flow. So as long as ARLP's cap ex requirements drop off, again that should remove pressure on the distribution.
Over the last 2 years, ARLP has been very conservative in raising its distribution. This has been annoying but probably for the best, considering coal prospects.
So to this point, I think the distribution is very safe at the current level. People (basically me) have been hoping that once the White Oak deal turned around, the distribution increases would accelerate but I can't see that happening now. But the current distribution looks safe.
Now, the bad news - ARLP is a coal miner and coal miners seem to be really optimistic. So ARLP bought reserves and contracts from Patriot last year, probably at a good price, but the last thing I wanted to see was more investments in coal. They have also started investing in oil & gas. My preference would be for them to pay down debt or raise the distribution. But they have continued to invest and on their calls they say they are evaluating other opportunities. I don't want to hear about opportunities. I want ARLP to digest its recent expansion and then see what happens.
And a customer is trying to break a contract for coal delivery on the basis on the EPA MATS rules. ARLP is fighting them, but watch that development.
There's no real volume in the pre-market so far so I don't think the PM price means much.
But at $ 6.40, the yield is 5.6%. I can't see any coal MLP or oil & gas MLP trading at a 5.6% yield. I think it goes lower. Take a look at the way when RNO cut its distribution 88% last year. On day 1, it traded at a 4% yield, but eventually dropped to the point where the yield hit 10%. I think something of the same sort happens with NRP, so I think we hit a $ 4-something price in the next few days.
But we'll see how it starts in 45 minutes.