Natural Resource Beats, Profit Dips

Natural Resource Partners L.P. (NRP - Analyst Report) reported second quarter 2012 earnings of 46 cents per unit, down 11.5% from the year-ago earnings of 52 cents per unit. The earnings underperformance stemmed from lower coal royalty receipts.

The quarterly earnings edged out the Zacks Consensus Estimate of 42 cents per unit.

Total Revenue

Natural Resource Partners recorded total revenue of $90.7 million, a decline of 6% from $97 million in the year-ago quarter. Lower coal royalty revenue resulting from fall in realized thermal coal prices led to the overall revenue decline in the second quarter. However, this was partially mitigated by increase in revenues other than coal royalty.

The reported quarter revenue was slightly higher than the Zacks Consensus Estimate of $89 million.

Sales and Production Update

Coal production during the quarter remained flat with the comparable year-ago quarter due to lower demand for thermal coal as a result of switching to natural gas, mild weather and regulatory obligations. This was partially countered by a rise in demand for low emission metallurgical coal.

A sharp fall in production of 70.3% year over year in the Northern Powder River Basin was offset by a concomitant 66% rise in the Illinois Basin operations.

Coal royalty revenue declined 11.6% to $63 million from $71.2 million in the prior-year quarter. This was due to decrease in royalty rates from old leases. Average coal royalty per ton also dropped 11.3% year over year.

Revenues, other than coal royalty, shot up 10% year over year in the reported quarter on account of a $2.2 million increase in infrastructure fees, surge in oil and natural gas revenues owing to an increase of $2.5 million in lease bonuses and a $4.1 million gain from asset sale.

Operational Highlights

Total operating costs and expenses during the quarter totaled $27.2 million, down 2.3% from the prior-year period. This was due to a year-over-year decline of 13% in depreciation, depletion and amortization expenses partially offset by an increase in general and administrative expenses by 9.2% year over year.

The partnership’s income from operation in the current quarter declined 8% to $63.5 million from $69.0 million in the year-earlier period. Lower operating expenses were not enough to mitigate the year-over-year fall in revenue, leading to diminished profits.

Interest expenses in the second quarter were $13.6 million versus $12.4 million in the year-ago quarter.

Financial Screening

Cash provided by operating activities during the quarter was $82.5 million versus $91.6 million in the prior-year quarter.

In the second quarter, distributable cash flow was $70.7 million, down 17% from the year-ago period. This was due to lower revenues from coal royalty and a $5.4 million increase in the partnership’s reserves of senior notes for future payments.

Cash and cash equivalents as of June 30, 2012 were $122 million versus $215 million as of December 31, 2011. The substantial decline in the partnership’s cash balance from the year-ago quarter was driven by acquisitions, principal and interest payments.

Long-term debt of the partnership as of June 30, 2012 was $829.7 million versus $836.3 million as of December 31, 2011.

Quarterly Distribution

On July 19, 2012, the Board of Directors of Natural Resource Partners announced a quarterly distribution rate of 55 cents per unit, representing an increase of 1.9% from the second quarter 2011 and in line with the first quarter 2012.

Guidance

Natural Resource Partners revised its guidance range for 2012. The partnership expects earnings in the range of $1.65 per unit to $1.85 per unit versus its prior expectation of $1.65 per unit to $1.95 per unit. Revenue is projected in the range of $340 million to $365 million in comparison to the previous forecast of $335 million to $380 million. Natural Resources lowered the revenue guidance range at the mid-point by $5 million and the net income projection by 5 cents per unit from the earlier guidance.

Coal royalty revenue for 2012 is forecast in a band of $245 million and $260 million versus the previous range of $265–$295 million. The narrowed guidance reflects the impact of declining coal receipts, which will be marginally offset by higher other coal royalty revenues.

The partnership increased the mid-point of the distributable cash flow range by $5.0 million to $220–$240 million versus its prior expectation of $210–$240 million. This is due to receipt of proceeds from a condemnation of a right-of-way in West Virginia and gains from asset divestiture.

Peer Comparison

The St. Louis, Missouri based peer, Peabody Energy Corporation (BTU - Analyst Report) reported second quarter 2012 earnings of 73 cents per share, beating the Zacks Consensus Estimate of 53 cents but falling short of the year-ago figure of $1.16 per share. The year-over-year decline was due to higher interest expenses and depreciation, depletion and amortization expenses related to the acquisition of Macarthur Coal in Australia.

Peabody’s quarterly revenue was $1,998.2 million versus $1,980.5 million in the prior-year quarter, reflecting year-over-year growth of 0.9%. The company’s revenue for the quarter fell short of the Zacks Consensus Estimate of $2,067 million.

Our View

Natural Resource Partners continued to perform well in the second quarter despite weakening thermal coal and natural gas prices. We believe that the recent hike in natural gas prices is insufficient to trigger a switch back to coal sources.

However, with the summer months ahead, the coal plants are expected to come back online. Increased demand for electricity will give a boost to the partnership’s steam coal operations in the Illinois Basin. Besides, higher domestic demand for met coal will drive the top line at Natural Resources.

Nevertheless, uncertainty regarding met coal demand in the international markets, particularly in Asia, could hurt the partnership’s profitability

Natural Resource Partners currently retains a Zacks #3 Rank which translates into a short-term Hold rating. We have a Neutral recommendation on the stock in the long term.