John Bridges CFA, ACSM AC

J.P. Morgan

212-622-6430

john.bridges@jpmorgan.com

Alliance Resource Partners LP (ARLP) reported a strong beat of our and consensus estimates due to better-than-expected sales and higher realized prices in the Northern Appalachia region. ARLP also increased its quarterly distribution to $0.955/unit from $0.9225/unit in the last quarter, in line with our expectation of $0.958/unit. We remain excited about the company’s strong yield and growth as it continues to deliver on its plans. We like the White Oak coal deal the company announced in the quarter and believe it will add value to the portfolio in the future …

The growth track record looks secure. ARLP has been growing its tonnage over the last decade, and with the pipeline of new mines under development, that trend looks secure. Tunnel Ridge is expected to ramp up and add four million tons (mt) in 2012, better than our expectation of 3 mt. Gibson South is expected to start production in 2014 and add another 3–3.5 mt. In the similar timeline, new production from White Oak is expected to come and add to the cash flows. We believe the strong cash position of ARLP and cash generation from operations place the company in the sweet spot to look for new growth opportunities.

The company reports that about 90% of its sales go to utilities that already have scrubbers installed. These units should, in our opinion, be less affected by the new EPA emissions rules than utilities that must still take the decision to build scrubbers to comply with the planned new rules. [Note: ARLP comments based on analyst’s October 2011 report.]

 

Paul Forward, CFA

Stifel Nicolaus

443-224-1379

pforward@stifel.com

[On February 14] Natural Resource Partners (NRP) reported 4Q11 EPU (earnings per unit) excluding items of $0.52 per unit, versus our estimate of $0.49 and the Street consensus of $0.47. NRP’s 4Q11 results were impacted by a non-cash impairment charge of $70.4 million recorded for the partnership’s Gatling Ohio property, which was idled by the mine operator due to adverse geologic conditions.

Production from the mine is not expected in the near-term future. This mine accounted for 1% of NRP’s 2011 revenues and is not included in NRP’s 2012 guidance, which it issued in the release. NRP’s 4Q11 EPU including this charge was a loss of $0.13 per unit.

Production in Northern Appalachia was ahead of our estimates, but lower in Central Appalachia, the Illinois Basin, and Northern Powder River Basin. Revenues other than coal royalties of $30.0 million were well ahead of our $21.9 million estimate and more than offset the coal-revenues miss. In 4Q11, NRP invested $12.8 million in oil and gas mineral acreage and further payments on construction related to aggregates. NRP ended 2011 with $215 million cash on its balance sheet.

The Street consensus for 2012 is $1.90. NRP said it expects 2012 coal production in the range of 52–58 mt (vs. our estimate of 57.5 mt). Using midpoints, NRP’s guidance reflects a 10% increase in production over 2011 levels, but approximately even coal royalty revenues. This guidance reflects the softening in prices for both thermal and metallurgical coal and associated lower average realized royalties per ton. We expect NRP’s Appalachian volumes will be weaker in 2012, offset by stronger Illinois Basin volumes due to the startup of the Deer Run longwall, which is expected to occur in August 2012.