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Natural Resource Beats Overall

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Natural Resource Partners L.P. (NRP - Free Report) reported first quarter 2012 earnings of 47 cents per unit, up 11.9% from the year-ago earnings of 42 cents per unit. The surge in earnings can be attributed to strong performance by the lessees partially offset by production curtailments announced by the leasing companies earlier this year.

Earnings edged out the Zacks Consensus Estimate of 42 cents per unit. GAAP and pro forma earnings were identical owing to the absence of one-time items.

Total Revenue

Natural Resource Partners’ first quarter total revenue recorded an 8.0% upsurge totaling $91.9 million driven by an increase in coal production in Northern Appalachia and the Gulf Coast region. This positive effect was partially offset by a decline in activities from the Central Appalachian area.

The reported quarter revenue was higher than the Zacks Consensus Estimate of $89.0 million.

Natural’s Sales and Production Update

Coal production during the quarter increased modestly by 1% from the year-ago quarter to 12.1 million tons. Metallurgical coal contributed 31% to total production.

Production in the Appalachian region grew by 3.7% year over year which was offset by a decline of 8.1% at the Illinois Basin operations.

Coal royalty revenue slipped 8.2% to $59.9 million from $65.3 million in the prior-year quarter. This happened due to lower royalty rates from old leases in the Northern Appalachian operations. Average coal royalty per ton also slipped 9.5% year over year.

Revenues, other than coal royalty, shot up 64% to $31.9 million in the reported quarter.

Operational Highlights

Total operating costs and expenses during the quarter totaled $27.0 million, down 6.8% from the prior-year quarter. This was on account of decline in depreciation, depletion and amortization expenses resulting from Gatling impairments. Also, general and administrative expenses decreased by 12.2% year over year. This was backed by lower unit price affecting accruals from long-term incentive plans.

The partnership’s income from operation in the current quarter rose 15.7% to $64.8 from $56.0 million in the year-earlier period.

Interest expenses rose to $13.6 million from $10.6 million in the year-ago due to debt incurred on acquisitions.

Financial Screening

Cash provided by operating activities during the quarter was $49.5 million versus $47.0 million in the prior-year quarter.

In the first quarter, distributable cash flow was $36.4 million, down 7% from the year-ago period. This was due to lower revenues other than coal royalty and rising interest costs.

Cash and cash equivalents as of March, 31, 2012 were $107.4 million versus $214.9 million as of December 31, 2011. The substantial decrease in 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 March 31, 2012 was $836.6 million versus $836.2 million as of December 31, 2011.


The partnership projects a weak performance in the first half of 2012 due to lower market demand for thermal coals which is expected to continue in the short term as a result of mild weather impacts. Increasing coal inventories coupled with lower natural gas price and uncertainties related to environmental regulations are other additional factors affecting growth in 2012.

On the bright side, however, domestic demand for metallurgical coal is anticipated to rise, owing to automobile production increase in the U.S. Along with this diversification and expansion in the Illinois steam basin is expected to insulate Natural Resource from the weakening demand condition. 

NRP believes switching that occurred in electrical grids and degradation of coal burn to reach its maximum point in 2012.

Peer Comparison

A competitor of Natural Resource Partners, Peabody Energy Corporation (BTU - Free Report) reported first-quarter 2012 earnings of 67 cents per share compared with 72 cents per share in the year-ago quarter.

The decline in earnings was due to higher interest expense related to the Macarthur Coal acquisition and an increase in depreciation, depletion and amortization expenses. Quarterly earnings significantly beat the Zacks Consensus Estimate of 56 cents.

Peabody’s quarterly revenue, at $2.04 billion, increased 17% from $1.7 billion in the year-ago period. This was driven by increased realized pricing for metallurgical and thermal coal from Australian operations and 5% growth in US revenue related to higher realized prices in the Western and Midwestern regions. The company’s revenue for the quarter fell short of the Zacks Consensus Estimate $2.12 billion.

Our View

The partnership’s capability to perform well in the face of weak macro environment is evident from its earnings as well as revenue growth.

We believe the partnership will provide positive outcome in 2012, especially with its metallurgical coal business expanding both in domestic and foreign markets. Acquisitions made in the Appalachian and Illinois basins will benefit Natural Resource Partners in the long run.

Add to that we anticipate that the partnership’s continuous drive to further diversify its operation through purchase of oil and gas acreage in Oklahoma will act as a growth catalyst in the future.

However, market demand for thermal coal is expected to plunge besides production curtailments by lessees acting as a constraining factor for the partnership.

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.

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