Still Neutral on NRP
We reiterate our Neutral recommendation on Natural Resource Partners L.P. (NRP). Natural Resource Partners posted favorable top and bottom line results in the second quarter 2012 with both figures surpassing the Zacks Consensus Estimates.
We believe the completion of acquisition of the high performing Deer Run mine will serve as an additional coal reserves facility and provide the benefit of easy transportation for supplying coal to the end users.
The partnership’s sizeable metallurgical coal operations and acquisition of oil and gas mineral acreage in the Mississippian Lime oil play are expected to strengthen its position in the utility market in the near future. Besides, rising demand for metallurgical coal, both domestically as well as internationally, particularly in the Asian markets of India, China and South Korea will substantially benefit the partnership.
However, increasing demand for natural gas will drive down thermal coal prices, which will result not only in lower production but also lead to a fall in royalty revenues. In addition, stringent government regulations and environmental policies enforced particularly on the coal and utility industries will impact the partnership’s margins.
Other negatives include reliance on a limited group of customers for royalty revenues and capital market risk which could limit the partnership’s growth opportunities. On a positive note, Natural Resources’ recent 1.9% hike in the quarterly distribution rate to 55 cents per unit is expected to arrest shareholders’ confidence in the near term.
Natural Resource Partners trimmed its guidance range for 2012. The partnership expects earnings in the range of $1.65 per unit to $1.85 per unit versus its prior expectation of $1.65 per unit to $1.95 per unit.
Revenue is projected in the range of $340 million to $365 million in comparison to the previous forecast of $335 million to $380 million. The narrowed guidance reflects the impact of declining coal receipts, which will be marginally offset by higher other coal royalty revenues.
The Zacks Consensus Estimates for the third quarter and full year 2012 currently stand at 42 cents per unit and $1.78 per unit, respectively. The partnership’s closest peer is Cloud Peak Energy Inc. (CLD).
Natural Resource presently holds a Zacks #3 Rank which translates into a short-term Hold rating. Based in Houston, Texas, Natural Resource Partners L.P., through its subsidiaries, engages in the ownership and management of coal properties in Appalachia, the Illinois Basin, and the western United States, as well as lignite reserves in the Gulf Coast region.
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