Penn Virginia Buys Coal Reserves

Penn Virginia Resource Partners L.P. (PVR - Analyst Report) has bought roughly 10 million tons of coal reserves in northern West Virginia for a cash transaction of $17.7 million. The company funded the acquisition through borrowings under its revolving credit facility.

The company said that the Pittsburgh Seam coal reserves that have been bought are in proximity to the 40 million tons of reserves it acquired in December 2002. The newly acquired reserves complement its existing Pittsburgh assets well.

In addition to the acquisition of the reserves, PVR will receive an increase in royalty of $1.00 per ton for every 10 million tons of coal reserves of the existing Pittsburgh reserves, plus a royalty on the newly-acquired reserves.

Through this acquisition Penn Virginia has stretched its coal reserve base in Northern Appalachia, one of the premier coal-producing areas in the country. Additionally, the company has enhanced the economic attractiveness of its coal royalty properties in this area. This acquisition is expected to be immediately accretive to distributable cash flow.

Penn Virginia Resources is a publicly-traded partnership that owns coal and natural gas assets. The company's core coal assets are located in Central Appalachia and the Illinois Basin, while the natural gas business is a midstream gathering and processing business in Oklahoma, Texas and Wyoming.

Fundamentally, the company's gas midstream operations are cash flow-generating businesses. But Penn Virginia uses its coal assets effectively to generate ample cash as well. Penn Virginia maintained its cash distribution at $0.47 per unit for the quarter. However, we expect the partnership to raise distribution in the future given the company's excessive distributable cash flow over the declared distribution.

Furthermore, the company continues to be an opportunistic acquirer of coal assets in its core operating areas, particularly as smaller players exit operations due to increasing expenses and safety concerns in those areas. The company is also active in expanding its gas business as is evident from its recent ventures in the Marcellus Shale with two firms.

Given the company's long history of distribution increases and the significance of both coal and natural gas in the energy infrastructure, we believe PVR is a good gamble for investors seeking exposure in the energy sector.

In addition, coal partnerships like Alliance Resource Partners (ARLP - Snapshot Report) and Natural Resource Partners (NRP - Analyst Report) are also good prospects for investments in the energy zone.

Read the full analyst report on PVR

Read the full analyst report on ARLP

Read the full analyst report on NRP