Natural Resource Partners L.P. (NRP): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Houston, Texas-based Natural Resource Partners L.P. is a master limited partnership principally engaged in the business of owning, managing and leasing mineral reserve properties. The partnership owns coal reserves and coal handling and transportation infrastructure in the three major coal producing regions of the United States Appalachia, the Illinois Basin and the Northern Powder River Basin (NPRB) besides lignite reserves in the Gulf Coast region.

As of Dec 31, 2013, Natural Resource Partners had steam (thermal) and metallurgical (met) coal reserves of around 1.89 billion tons and 0.43 billion tons, respectively.

At the end of 2013, 49.2% of the reserves were low sulfur coal and 32.1% were compliance coal. Compliance coal is basically a part of low sulfur coal which when burned contributes to low emission of 1.2 pounds of sulfur dioxide per million British thermal unit (Btu).

As on Dec 31, 2013, Natural Resource Partners has around 2.33 billion tons of proven and probable coal reserves and 500.0 million tons of aggregate reserves in a number of states across the country.

The partnership generates its revenues by leasing its minerals or natural resources to mine operators under long-term contracts, which grant its lessees the right to mine in exchange for royalty payments.

Natural Resource Partners also owns preparation plants, coal handling facilities, and transportation infrastructure, as well as owns and manages aggregate reserves in Washington, Texas, Arizona, and West Virginia.

In addition, the partnership is currently diversifying its operations. In 2013, Natural Resource Partners invested a total of $365 million to acquire a non-controlling equity interest in OCI Wyoming, L.P. for $292.5 million and for the completion of two acquisitions of non-operated working interests in oil and gas operations in the Williston Basin for $72 million. The partnership owns numerous interests in oil and gas properties, based in the Appalachian Basin, Louisiana and Oklahoma.

In 2013, the partnership produced around 53.3 million tons of coal from its leased properties, making up for coal royalty revenues of $212.7 million. Core operations in the Appalachian region contributed roughly 69% to the total revenue while around 26% came from the Illinois Basin. Other areas including Northern Powder River Basin and Gulf Lignite Coast chipped in with approximately 4% and 1% of total revenue, respectively.

Source: Partnership

REASON TO BUY

Natural Resource Partners' business is low-risk as it does not operate any of the assets it owns, but rather leases them to operators for a royalty or fee. The partnership's royalties from the coal properties and infrastructure assets that it owns is based on a fixed price or a percentage of sales, whichever is higher, in addition to minimum payments. This allows Natural Resource Partners to avoid large expenses and liabilities involved in the capital intensive coal mining business. By not keeping aside substantial amount of fund for capital expenditures or legacy liabilities, the partnership can generate large amount of distributable cash flow. Locking in contracts that guarantee minimum payments helps Natural Resource Partners to consistently generate cash even in the event of a coal producing property or properties facing problems.

There is some good news for the coal industry in the coming years. As per a World Steel Association report published in Oct 2013, utilization of steel is expected to increase in 2014 on the back of higher steel demand in the U.S., China, India, Russia, Ukraine, and the Middle East and North African (MENA) region. The 3.3% year over year increase in steel demand in 2014 is due to the growth in the automotive, energy and residential construction sectors. To cope up with the increased met coal demand from the steel manufacturers, the lessees of coal reserves owned by Natural Resource Partners may scale up the production volume. Subsequently, this factor is likely boost the partnership's future coal royalty revenues.

Natural Resources Partners is currently diversifying its asset-base, by adding oil and gas properties to its existing portfolio of coal assets. The partnership invested a total of $365 million in 2013 for several acquisitions, including non-operated working interests in oil and gas properties in the Williston Basin and a non-controlling equity interest in OCI Wyoming, L.P., an operator of a trona ore mining operation and a soda ash refinery in the Green River Basin. We consider the partnership's strategic non-core asset acquisition program as a positive move for its future growth. As per an U.S. Energy Information Administration's report published on March 11, 2014, despite a projected rise in coal consumption in the in 2014, there will be slackness in coal utilization going forward. So, expansion towards oil and gas operations will enable Natural Resources Partners to reduce dependence on coal operation and expand revenue streams.