Strong domestic and international usage in 2008 should benefit the coal sector, analysts say.
David M. Khani, CFAFriedman, Billings & [email protected]
Outlook: Though utility inventory is still high, we expect that inventory could fall to around 100 million tons by the end of 2008, given growing exports (about 70 million tons), flat-to-down imports, Central Appalachian Coal (CAPP) production declines (about 20 million tons), and demand increase from new power plants (about 1,200 million watts/megawatts due in 2008). The negatives could be a slowing economy and more coal-on-gas competition.
We are hearing that CAPP contract prices are rising again, with domestic delivery heading into the high $50s and export tons into the low $60s. Furthermore, Northern Appalachian Coal (NAPP) discussions are now starting in the high $60s/low $70s. Utilities at present feel very confident about their Powder River Basin exposure, usually a signal that it will move within the next six months.
Foreign exchange is only a partial driver. The main driver remains China and India’s coal-fired power-generation growth.
Why Natural Resources Partners (NRP)? NRP has solid exposure to the rising Northern and Central Appalachian (NAPP and CAPP) coal markets (13 million tons and 30 million tons respectively) and the metallurgic coal market (15 million tons). Additionally, the company’s model is based on revenues and actually benefits from cost inflation (drives future price increases). Moreover, due to the recent drop in the 10-year Treasury yield, we are raising our 12-month price target to $41 from $39, reflecting a 6.85 percent discount rate on our 2008 and 2009 average distributable cash flow of $193 million.
The combination of 6 percent yield of 2008 forecasted distributions of $2.11/unit and capital appreciation of 24 percent creates a 30 percent total return for shareholders.