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Natural Resource Partners L.P. (NRP - Analyst Report), a master limited partnership engaged in the ownership and management of mineral reserve properties, is slated to release its second-quarter 2012 earnings result after the market bell on August 6, 2012.

Recap, First-Quarter 2012

Natural Resource Partners registered favorable earnings of 47 cents per unit which surpassed the year-ago earnings as well as the Zacks Consensus Estimate of 42 cents per unit. Although the coal market posed challenges for the partnership, strong performance by the lessees helped in triggering earnings growth in the first quarter. However, this positive effect was partially offset by production curtailments announced by the leasing companies in early 2012.

The partnership’s top-line position also witnessed growth on the back of increased met coal production in the Northern Appalachia and the Gulf coast region, partially compensated by output lag at the Central Appalachia play. Total revenue surged 8.0% year over year to $91.9 million driven by rising demand for low emission met coal. Revenue surpassed the Zacks Consensus Estimates of $89.0 million.

Guidance 2012

Natural Resource Partners expects a down drift in the US thermal coal market, which would weaken its performance in the near term. In addition, the rise in coal inventories, low natural gas prices and regulatory pressures are additional factors that will affect its growth prospects.

Positives include continual increase in met coal demand due to production surge in the US automobile industries, diversification and expansion of Illinois Basin, which could cushion the partnership from the low demand conditions prevailing in the steam coal markets.

Zacks Consensus

The Zacks Consensus Estimate for the second quarter 2012 is 42 cents per unit, down 12.5% from 48 cents reported in the comparable quarter last year. At present, the Zacks Consensus Estimate for earnings ranges from 41 cents per unit to 43 cents per unit.

For full-year 2012, the Zacks Consensus Estimate is $1.78 per unit, lower than its previous year-end earnings of $1.99 per unit. The current Zacks Consensus Estimate ranges between $1.74 per unit and $1.82 per unit.

Estimate Revisions Trend

Agreement

We do not witness any major estimate revisions at this point. For second quarter, 1 estimate among the 5 estimates went down in last 30 days and none moved upwards. The estimates remained unchanged in the last 7 days.

For 2012, 1 estimate among the 5 estimates went down in last 30 days and none moved in the opposite direction. The estimates remained unchanged in last 7 days.

Magnitude

The Zacks Consensus Estimate for the second quarter inched down by a penny in the last 30 days. Similarly, for full-year 2012, the consensus estimate dropped by a penny in the past 30 days. For the past 7 days the consensus estimates remained stationary both in the second quarter and full year 2012.

Surprise History

With respect to earnings surprises, the partnership’s actual earnings over the past four quarters widely surpassed the corresponding Zacks Consensus Estimates.

The earnings surprise in the last four quarters ranged from 9.1% to 43.9%. The average surprise over the last four quarters remained a positive 19.6%.

Our Recommendation

Natural Resource Partners’ business is considered low-risk as it does not operate any of the assets it owns, but rather leases them to operators for a royalty or fee. The partnership’s solid metallurgical coal operations and acquisition of oil and gas mineral acreage in the Mississippian Lime oil play are projected to strengthen its profile in the utility market.

However, heavy dependence on production from its lessees makes the partnership’s operation vulnerable as the lessees have the option to influence the production rate. The lessees’ recent step to curb output will impact the partnership’s top line. Moreover, weakness in thermal coal prices is expected to continue owing to switching to natural gas which will pose serious challenges for Natural Resource Partners.

Natural Resource Partners operates in a competitive US energy market and faces stiff competitions from peers like Peabody Energy Corp. (BTU - Analyst Report) and Cloud Peak Energy Inc. (CLD - Snapshot Report).

Currently, we are maintaining a long-term Neutral recommendation on Natural Resource Partners. The partnership has a Zacks #4 Rank implying a short-term Sell rating on the stock.

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