On Oct 18, 2016, we issued an updated research report on Natural Resource Partners LP NRP. The partnership is working on a strategic plan to strengthen its balance sheet and improve its liquidity. As part of its endeavor toward focusing on core operations, Natural Resource Partners has shed its non-operated oil and gas working-interest assets. However, the partnership’s coal royalty revenue continues to drop, thanks to the continuous decline in coal demand for electricity generation.
To counter the bleak coal market fundamentals, Natural Resource Partners is working on a plan to consolidate its balance sheet and improve liquidity. The partnership exited the second quarter of 2016 with cash of $21.4 million, while it repaid debts worth $108.5 million in the first half of 2016. The partnership had lowered its distribution per unit by over 87% in 2015, which will free up nearly $150 million of additional cash annually for debt repayment.
Meanwhile, during the second quarter, Natural Resource Partners announced management’s intention of selling its non-operated oil and gas working-interest assets in the Williston Basin for $116.1 million. These assets were finally sold in July, allowing the partnership to concentrate on its core operations, primarily the aggregates, soda ash, and coal and hard minerals business segments. A portion of the net proceeds was used to repay the NRP Oil and Gas RBL facility in full.
On the flip side, coal royalty is a primary source of revenue for Natural Resource Partners. But coal is being increasingly replaced by natural gas for power production due to the latter’s clean burning nature as well as growing regulatory pressure to curb carbon pollution. This is naturally hurting royalty revenue from Natural Resource Partners’ thermal coal assets.
Moreover, coal prices have been hitting multi-year lows over the past few months due to global economic conditions. Declining coal prices would dampen margins of Natural Resource Partners’ lessees, thereby lowering their ease and flexibility of paying royalties to the partnership.
Zacks Rank & Key Picks
Natural Resource Partners carries a Zacks Rank #2 (Buy). Other favorably ranked stocks in the same space include Alliance Resource Partners LP ARLP, Cloud Peak Energy Inc. CLD and Hallador Energy Company HNRG.
Alliance Resource Partners recorded a positive earnings surprise of 50.00% last quarter and has delivered a one-year return of about 5.5%. The stock presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Cloud Peak Energy, another Zacks Rank #1 stock, delivered a 237.1% positive earnings surprise last quarter. The stock has returned about 103.3% in the last one year.
Hallador Energy has a Zacks Rank #1 and has witnessed a 1050.00% positive earnings surprise in the last reported quarter. The company has reported a one-year return of about 26.6%.
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