Penn Downgraded to Underperform

We have downgraded our recommendation on Penn Virginia Resource Partners L.P. ( PVR - Analyst Report ) to Underperform from Neutral owing to a decline in coal production, lower commodity prices and higher rate of transition to emission-free resources from coal.

We have also considered Penn Virginia’s lower-than-expected second-quarter 2012 top- and bottom-line performance in our recommendation change. This was due to lower natural gas liquid (“NGLs”) prices and coal royalties, weak coal market condition, decline in fee-based contracts in the Midcontinent business and a slowdown in natural gas business.

In addition, Penn Virginia’s over-dependence on a limited group of customers for its natural gas midstream and coal royalty revenue is a major threat for its future financial performance. If any of these customers become insolvent or fail to make payment on time, the partnership’s revenues and profits will significantly be affected.

Apart from facing threats from customers, Penn Virginia is also witnessing challenges from its third-party service providers in terms of receiving and supplying of gas and NGLs. Sometimes, capacities of the interconnecting pipelines get affected due to pipeline testing and repairing, and reduction in operating pressures. This factor could adversely affect the partnership’s revenues and cash flows.

However, we have identified few prospective silver-linings under the strong downbeats, which might mitigate these negatives. These positives include Penn Virginia’s steady acquisition and organic growth strategy and quarterly distribution hike at regular intervals.

Penn Virginia narrowed its full-year 2012 and 2013 earnings before interest, tax, depreciation and amortization (“EBITDA”) guidance. In 2012, the partnership expects EBITDA to be in the range of $245-$260 million, down from the earlier expected band of $260-$280 million. Similarly, 2013 EBITDA guidance is lowered to $415-$480 million from $450-$540 million.

As per the Zacks Consensus Estimates, Penn Virginia’s earnings for the third-quarter and full-year 2012 are currently pegged at 9 cents per unit and 53 cents per unit, respectively.

Penn Virginia Resource Partners L.P. currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

Radnor, Pennsylvania-based Penn Virginia Resource Partners, L.P. is engaged in the management of coal and natural resource properties and gathering and processing of natural gas in the U.S. The partnership competes with CONSOL Energy Inc. ( CNX - Analyst Report ) .