Mark L. Reichman
While we believe the long-term outlook for the coal industry is constructive, the combination of a weak economic environment, falling commodity prices, and uncertainty regarding energy policy could pose near-term challenges.
That being said, coal equity prices have pulled back sharply and, in our opinion, reflect this sentiment while offering attractive yields and valuations. For investors who desire to diversify their portfolios to include exposure to the coal industry, we believe coal master limited partnerships offer an appealing way to participate in the sector. These include Alliance Resource Partners L.P. (ARLP), Natural Resource Partners (NRP) and Penn Virginia Resource Partners L.P. (PVR).
The attractive yield and growing distributions offered by coal-oriented master limited partnerships provide income and yield that can help buffer returns during changes in the business cycle and swings in investor sentiment toward the group.
NRP is well-positioned to grow organically and through acquisitions based on opportunities to purchase coal properties from its general partner as well as from third parties and to benefit from recent acquisitions and strategic partnerships with entities such as The Cline Group and Taggart Global. From the time of its IPO in ’03, the partnership has compiled a successful track record of growing its business and consistently increasing distributions to unit holders while maintaining a prudent margin of safety in its cash flow coverage of the distribution and a relatively conservative stance towards leverage.
PVR has a successful track record of growing its business and has consistently increased its distributions to unit holders from the time of its initial public offering in ’99. PVR will likely take a conservative view toward distribution growth in ’09, but we view the distribution as secure. In our forecast, the partnership’s coal-related operations should post solid results in ’09, although the performance of its midstream natural gas business is less certain.
Paul Forward, CFA
Stifel, Nicolaus & Co.