Significant Value

The quarterly dividend rate of $0.40 per share ($0.80 per ADR) is unchanged. New projects have the potential to add 1 million Boe/d of new production and 0.3 million Bbls/d of new refining capacity over the medium/longer term, but we do not expect any short-term impact.

Our sector performer rating and $90.00 price target for shares of Royal Dutch Corporation (RDS-A on NYSE) are unchanged. The shares, which trade at a relatively low P/E multiple and provide a relatively attractive dividend yield, are attractive for “value” oriented investors.

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Peter D. Ward, CFALehman [email protected]

Coal: Despite strong out-performance over both the past year and the past decade, we remain bullish on the prospects for U.S. coal equities.

Our long-term thesis remains intact. That is, in a world increasingly short of energy, U.S. coal producers have a significant amount of energy value in the ground. And, in our opinion, this value remains underappreciated by many observers. With high barriers to entry, decades of reserves, and little exploration expense, we believe U.S. coal producers are likely to generate significant free cash flow for many years.

Recent enthusiasm for U.S. coal equities has been largely driven by a bullish outlook for U.S. exports. We believe this enthusiasm is well justified. Historically, the U.S. played a substantial role as swing supplier to the global market. Global demand for coal remains very strong. Meanwhile, export competitors such as South Africa, China, Australia, and Indonesia cannot meet demand. We believe net U.S. exports could reach 90 million tons in the next few years. In our opinion, the sustainability of high coal prices will surprise many observers. We are raising earnings estimates and target prices for all U.S. coal producers.

Despite this recent sell-off, U.S. coal equities have delivered significant out-performance over both the past year and decade. [Recently], the European spot coal price had a significant correction. Prices were down 10 percent at one point during the day before closing down 6 percent. Without question, this is a significant one day move for a commodity. However, in our opinion, some perspective is warranted. The coal price has “corrected” to about $216/ton. The price was $130/ton at the start of 2008. And, the price was as low as $30/ton in 2002. In our opinion, it is a real stretch to argue that coal is now in a bear market.

We believe the fundamentals for U.S. coal remain very strong. Indeed, rather than lower estimates, we are significantly increasing EPS estimates and price targets for all the equities and partnerships in our coverage universe. In most cases, our coal price assumptions are well below published spot prices. We remain confident the risk to all our coal price assumptions remains significantly to the upside.

As we have argued for years, the ownership of decades of developed coal reserves represents a bigger barrier to entry than many perceive. Coal equities typically have an enormous amount of energy value in the ground. In a world that is clearly short energy, these assets in the ground deserve increased recognition by investors, in our opinion.

With oil prices at near record highs and U.S. consumers demanding solutions to burdensome gasoline prices, it appears to us that policies encouraging coal-to-liquids conversion technology may gain favor. With coal representing about 90 percent of the fossil fuel reserves of the United States, coal-to-liquids should be a part of the energy solution for the United States in our opinion.

Natural Resource Partners: We are raising our earnings estimates for all coal companies within our coverage universe due to increases in our coal price forecasts. In our opinion, strong global demand for thermal and metallurgical coal combined with significant restraints on potential supply increases will provide support for higher pricing levels in the years ahead. NRP has exposure to higher coal pricing through the royalty payments it receives from its lessees.

Our new $46 target price assumes a 5.2 percent yield on our 2009 distribution estimate of $2.40. Our previous target price of $45 assumed a 5.3 percent yield on our 2009 distribution estimate.

With an attractive and well-protected yield, we believe the risk/return of these units is attractive. Our $46 target price for NRP is based on a 5.2 percent yield on our 2009 distribution estimate of $2.40 per unit.

The partnership has a high-multiple equity currency which can be used for acquisitions. Since its IPO, the company has acquired over 1 billion tons of reserves. Cash flows are leveraged to what we believe are strong fundamentals for coal prices and volumes.

After borrowing $23 million under its credit facility in the fourth quarter to fund the acquisition of an overriding royalty interest from Massey Energy on certain low-volatile metallurgical coal reserves and 17.5 million tons of low-vol met coal from National Resources, the partnership’s debt/cap is now 41 percent. NRP currently has revolving borrowing capacity of $300 million under its credit facility that can be expanded to $450 million on similar terms.

We believe the steady and relatively low-risk cash flows of the coal royalty business are ideally suited for the MLP structure. More than other coal MLPs, NRP provides substantial leverage to what we believe will be significantly higher realized metallurgical coal prices.