On Feb 14, 2013, we downgraded our recommendation on PVR Partners L.P. (PVR) to Underperform from Neutral. The partnership currently has a Zacks Rank #5 (Strong Sell).
Reasons for Downgrade
The combined negative impact from PVR Partners’ over-reliance on a limited group of customers, and greater dependence on third party service-providers for receiving and supplying gas and natural gas liquids (NGLs) to its customers forced the downward revision. In addition, possibilities of switching to emission-free resources from coal, lower commodity prices and weak coal market conditions also compelled this revision.
Causes for Concern
PVR Partners’ over-dependence on a limited group of customers for its coal royalty and natural gas midstream revenue is a risk to its future performance. If any of these customers become insolvent or fail to keep their commitment, the partnership’s financial results will be significantly affected.
PVR Partners is also witnessing challenges from third-party service providers in terms of receiving and supplying gas and NGLs. Sometimes, capacities of the interconnecting pipelines get affected due to pipeline testing and repairing, and reduction in operating pressure. These could also restrict revenues.
In addition, we are cautious about regulatory intervention to minimize greenhouse gas emissions. Shift of electric power generators to other sources of fuel or substituting the use of coal with natural gas or renewable energy, could affect the ability of PVR Partners’ lessees to sell the coal they produce, thus reducing coal royalty revenues.
Other Stocks to Consider
Other stocks in the energy sector that are currently performing well include Atlas Energy, L.P. (ATLS), Crestwood Midstream Partners LP (CMLP) and MPLX L.P. (MPLX). All 3 carry a Zacks Rank #1 (Strong Buy).
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