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.
We expect the coal markets will be in balance by 2010 with the help of recovering economic activity and a second year of declining Appalachian coal output (-6.5 percent in ’09, -4 percent in ’10).
Alliance Resource Partners provided the following guidance for ’09: Coal production of 28.5 million-29 million tons (vs. our previous estimate of 28.2 million tons); revenues (excluding transportation) of $1.36 billion-$1.44 billion (vs. our previous estimate of $1.35 billion); EBITDA of $400 million-$440 million (vs. our previous estimate of $352.1 million) and net income of $240 million-$280 million (vs. our previous estimate of $212.7 million).
We view the strong EBITDA and net-income guidance for 2009 as reflecting Alliance’s large (90 percent-plus) contracted position, its lack of exposure to metallurgical coal markets and attractively priced contracts signed over the past 12-18 months.
We think Joy Global’s (JOYG) FY1Q09 results are encouraging in the context of what we believe were low expectations coming into the quarter. JOYG’s EPS beat our expectations on higher operating margins as a result of good operating leverage and cost control, which we think should be very important going forward in a declining market in an industry with high fixed costs.
Management did not change its 2009 EPS guidance of $3.60-$4 (vs. our $3.65 and consensus of $3.51) and sales guidance of $3.5 billion-$3.7 billion (vs. our $3.6 billion and consensus of $3.6 billion), which we think is a positive given the negative expectations built into the stock.