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NRP Beats on Lower Cost

Zacks Equity Research

Natural Resource Partners L.P. (NRP) reported third quarter 2012 earnings of 48 cents per unit, down 14.3% from the year-ago earnings of 56 cents per unit. The quarterly earnings however beat the Zacks Consensus Estimate of 42 cents per unit.

The year-over-year bottom-line decline is attributable to continued decrease in coal royalty receipts and weak natural gas prices, partially offset by strong growth from Southern Appalachia operations.

Total Revenue

Natural Resource Partners registered quarterly revenue of $94.2 million, down 8.7% from $103.2 million in the year-ago quarter. The decline in coal royalty revenue compounded by a drop in oil and gas revenue dragged down the overall top-line of the partnership. This was partially mitigated by higher output and prices from the Southern Appalachia play.

The reported quarter revenue surpassed the Zacks Consensus Estimate of $86 million.

Sales and Production Update

Coal production during the quarter notched up 2% to 13.3 million tons from 13.1 million tons in  the year-ago quarter. The key positive driver was substantial growth in the Southern and Northern Appalachia prospects, partially offset by decline in output from the Central Appalachia play.

Northern Powder River Basin witnessed a 23.8% decline in production volumes along with a 5.7% fall in the Illinois Basin operations.

Coal royalty revenue declined 6.3% to $70.3 million from $75.0 million in the prior-year quarter owing to average coal royalty per ton plunging 8% year over year.

Revenues, other than coal royalty, decreased 15.2% year over year in the reported quarter on account of reduction in oil and natural gas revenues and coal processing fees, partially offset by increase in Other revenues.

Operational Highlights

Total operating costs and expenses during the quarter totaled $28.5 million, down significantly by 76.5% from $121.0 million in the prior-year period. This was due to year-over-year declines of 26.9% and 17.4% in depreciation, depletion and amortization expenses and transportation costs, respectively. This was partially offset by an increase in general and administrative expenses by 49% year over year.

The partnership’s income from operation in the current quarter increased to $65.6 million from a loss of $18.0 million in the year-earlier period. Lower operating expenses substantially outweighed the year-over-year fall in revenue boosting profits.

Interest expenses in the third quarter were $13.7 million versus $12.8 million in the year-ago quarter.

Financial Screening

Cash provided by operating activities during the quarter was $61.9 million versus $79.6 million in the prior-year quarter.

In the third quarter, distributable cash flow was $65.1 million, down 14.9% from the year-ago period. This was mainly due to lower revenues and an increase of $5.4 million in reserve for future principal payments on the partnership’s senior notes.

Cash and cash equivalents as of September 30, 2012 were $122.4 million versus $214.9 million as of December 31, 2011.

Long-term debt of the partnership as of September 30, 2012 was $852.0 million versus $836.3 million as of December 31, 2011.

Quarterly Distribution

On October 17, 2012, the Board of Directors of Natural Resource Partners announced a quarterly distribution rate of 55 cents per unit, payable on November 14, 2012 to unitholders of record as of November 5, 2012.

Peer Comparison

The St. Louis, Missouri based peer, Peabody Energy Corporation (BTU) reported third quarter 2012 earnings of 51 cents per share, beating the Zacks Consensus Estimate of 34 cents but falling short of the year-ago figure of 90 cents per share. The year-over-year decline was due to higher interest expenses and depreciation, depletion and amortization expenses, partially offset by a decline in selling and administrative expenses.

Peabody’s quarterly revenue was $2,058.8 million versus $1,980.6 million in the prior-year quarter, reflecting year-over-year growth of 4%. The company’s revenue for the quarter exceeded the Zacks Consensus Estimate of $1,975 million.

Our View

Natural Resource Partners posted favorable top- and bottom-line outcomes beating the Zacks Consensus Estimates in the third quarter 2012. However, the partnership’s performance declined year over-year.

The partnership is likely to witness favorable profits due to increased demand for electricity for the ongoing winter months. However, continual coal-to-gas switching will pose challenges.

Prospects for metallurgical coal are improving tepidly as demand is expected to steadily recover in the next year with slow growth in steel production. On the flip side, large coal inventory in the Central Appalachia could act as a headwind going forward.

Natural Resource Partners currently has a Zacks #3 Rank (Hold rating). We have a Neutral recommendation on the stock in the long term.

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