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PVR Partners Posts Mixed Numbers

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PVR Partners, L.P. announced its third-quarter 2012 pro forma earnings per unit of 6 cents compared with 29 cents in the year-ago quarter. This decline was attributable to a weakening coal market condition, decreasing natural gas and natural gas liquid prices, and higher depreciation costs. Quarterly earnings were lower than the Zacks Consensus Estimate of 9 cents per unit.

The partnership’s third-quarter 2012 GAAP earnings per unit were 32 cents versus 50 cents in the prior-year period. The difference between pro forma and GAAP earnings of 26 cents per unit was due to a 26 cents gain for sale of plant, a penny gain related to cash payments to settle derivatives and a penny charge for derivative losses.

Total Revenue Performance

PVR Partners posted third-quarter 2012 revenues of $268.8 million, a decline from $308.4 million in the prior-year quarter. Lower contribution from the partnership’s natural gas and natural gas liquids businesses and decline in coal royalties resulted in the adverse revenue position. However, quarterly revenue beats the Zacks Consensus Estimate of $239.0 million.

Segmental Highlights

Eastern Midstream Segment: Revenue surged significantly to $26.8 million from $7.7 million in the year-ago quarter, reflecting a whopping 248.1% growth. This can be attributed to an increase in average production volumes by 393 million cubic feet per day (“MMcfd”) owing to an expansion of PVR Partners’ Lycoming and Wyoming systems, and acquisition of Chief Gathering LLC.

Midcontinent Midstream Segment: In the third quarter of 2012, revenue from this segment witnessed a steep decline to $207.5 million compared with $253.2 million in the year-ago quarter. The year-over-year decline in revenue was primarily due to soft natural gas and natural gas liquids prices, and sale of Crossroads system on July, 2012.

Coal and Natural Resource Management Segment: This division posted third-quarter 2012 revenues of $34.5 million, down from the year-ago level of $47.5 million. This was primarily due to coal royalty revenues plummeting to $28.8 million from $41.0 million in the prior-year quarter. Coal royalty volume declined to 7.7 million tons in the reported quarter compared with 9.5 million tons in the year-ago quarter.

Update on Capital Investment and Project Expansion

During the quarter, PVR Partners invested $150.0 million on its internal growth projects, primarily in the Eastern Midstream Segment.

The partnership expects its Wyoming County Pipeline to be online at the end of third-quarter 2012. PVR Partners’ Phase III and the Canton Lateral on its Lycoming County, Pennsylvania gas trunkline and water line are expected to start operation by the end of the fourth quarter of 2012.

The first-phase of construction of the new gathering system in Lycoming County is expected to start on time.

Operational Update

In the quarter under review, PVR Partners’ total expenses declined to $208.4 million from $270.8 million in the year-ago quarter. One of the major factors that contributed to the decline was the cost of gas purchased, which dropped 34.2% from the prior-year quarter.

The partnership’s third-quarter 2012 earnings before interest, tax, depreciation and amortization (“EBITDA”) increased to $61.2 million versus $60.0 million in the year-ago quarter.

Total operating income increased to $60.5 million in third-quarter 2012 compared with $37.6 million in the prior-year quarter. This rise in operating income was on account of a marked drop in the partnership’s total expenses level. 

Financial Condition

Cash and cash equivalents of the partnership as of September 30, 2012, were $10.1 million, up from $8.6 million as of December 31, 2011.

During the quarter, cash flow from operating activities of the partnership was $66.2 million, higher than $49.9 million in the previous-year quarter.  

Guidance

PVR Partners reiterated its guidance for full-year 2012. The partnership expects its full-year 2012 EBITDA and distributable cash flow, net of maintenance and replacement capital to be in the range of $245.0 - $260.0 million, and $120.0 - $130.0 million, respectively.

For full-year 2012, the partnership expects to invest approximately $485.0 million in its internal growth projects.

Quarterly Distribution

The Board of Directors announced to increase the quarterly distribution to 54 cents per unit from 53 cents per unit and payable in cash on November 14, 2012 to common unitholders of record on November 7, 2012. As a result of this quarterly distribution hike, the annualized distribution rate will be $2.16 per unit, represents an increase of 8.0% over the prior-year quarterly distribution.  

Peer Update

PVR Partners’ competitor CONSOL Energy Inc. (CNX - Analyst Report) announced its third-quarter 2012 pro forma loss of 5 cents per share, down from the year-ago earnings of 73 cents and the Zacks Consensus Estimate of 2 cents.

In the quarter under review, the partnership reported total revenue of $1,160.1 million versus $1,522.0 million in the year-ago quarter. Quarterly revenue also failed to meet the Zacks Consensus Estimate of $1,234.0 million.

Our View

PVR Partners surpassed the revenue estimate in the third quarter of 2012, but fell short of the earnings projection. We believe that lower commodity prices accompanied by weak coal market condition would negatively affect the partnership’s profitability in the future. In addition, over reliance on a limited group of customers as well as increasingly switching to emission free resources are also matters of concern.

However, we have identified few prospective positive catalysts like PVR Partners’ steady acquisition and organic growth strategy, and quarterly distribution hike at regular intervals, which might mitigate these negatives.

PVR Partners, L.P. currently has short-term Zacks #3 Rank (Hold rating).

Radnor, Pennsylvania-based PVR Partners, L.P., earlier known as Penn Virginia Resource Partners, L.P., owns and operates a string of natural gas midstream pipeline systems and processing plants and is also involved in the management of coal as well as natural gas properties. The partnership’s current market capitalization stands at $2.29 billion.

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