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On Jun 25, we issued an updated research report on Natural Resource Partners LP (NRP - Analyst Report). The coal operator’s gradual expansion of oil and natural gas operations bode well for future growth as oil and gas are riding on a strong momentum.

The partnership’s asset diversification strategies seem to have paid off as the Sources Other than Coal segment comprised 35% of the Natural Resource Partners’ total revenue in the first quarter, up 17% from the year-ago period. The acquisition of equity interest in OCI Wyoming, L.P., and a soda ash refinery in the Green River Basin could be growth catalysts for the partnership.

However, the Environmental Protection Agency’s (EPA) new proposals for slashing carbon emissions from coal-fired plants by 30% by 2030 from 2005 levels would impact coal supply to the plants. This could weigh on the partnership’s future performance. Moreover, a lower cash distribution offering might fail to retain investors’ confidence in the stock.

This Zacks Rank #3 (Hold) stock’s first-quarter 2014 results were decent, with the top and bottom lines marginally beating the Zacks Consensus Estimate. Lower production by lessees and a decline in coal royalty receipts primarily affected Natural Resource Partners’ performance. On a year-over-year basis, both earnings and revenues fell from the year-ago period.

However, good news awaits coal players like Natural Resource Partners, as a report by World Steel Association projects steel usage to increase by 3.1% in 2014 backed by bullish steel demand in the U.S., China, India, Russia, Ukraine, and the Middle East and North African regions.

The optimistic market fundamentals in the automotive, energy and residential construction sectors will drive the steel demand, the major production input of which is metallurgical coal.

Nevertheless, dependence on few customers might pose risks to the partnership’s prospects. Natural Resource Partners in the first quarter derived 36% of its total revenues from its lessees, down from 46% in the year-ago period. Any loss of these lessees will cost the partnership dearly.

Key Picks from the Sector

Some better-ranked coal players include Alliance Holdings GP, L.P. (AHGP - Snapshot Report), Alliance Resource Partners LP (ARLP - Snapshot Report) and CONSOL Energy Inc. (CNX - Analyst Report). Alliance Holdings and Alliance Resource Partners carry a Zacks Rank #1 (Strong Buy) while CONSOL Energy holds a Zacks Rank #2 (Buy).

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