Penn Virginia Resource Partners LP: Down But Not Out

With the price of coal for power generation down 22 percent this year, miners of the black mineral aren’t on many investors’ buy lists.

Global demand, however, remains robust, and even US demand is stabilizing. That means now is a great time to pick up shares of Penn Virginia Resource Partners LP PVR, which owns roughly 900 million tons of proven coal reserves.

The master limited partnership(MLP), which relies on others to mine its lands, saw first-quarter coal royalties sink 15 percent, as volumes shrank to 8.1 million tons from last year’s 9.9 million. That offset a 3.8 percent boost in royalties per ton.

Penn Virginia still raised its payout for the fifth consecutive quarter. Management also completed the $1.06 billion acquisition of Chief Gathering LLC, adding valuable energy-gathering systems in the gas liquids-rich Marcellus Shale.

The MLP now controls more than 4,500 miles of pipe and seven processing systems, located primarily in Texas, Oklahoma and Pennsylvania. And given the Marcellus’ very low costs and proximity to the Northeast US, there are numerous opportunities for expansion.

Management expects 75 percent of cash flow to come from such fee-based midstream operations in 2013. This promises to extend the company’s string of five consecutive quarterly dividend increases, even if coal prices remain in the doldrums.

The greatest threat to the nearly 9 percent yield is the low coverage ratio (for more on the importance of coverage ratios see MLPs and Building Wealth). Until this improves the unit price is likely to languish. But a recently upsized bond offering--to $600 million from $400 million--as well as upbeat analyst sentiment and recent insider buying are undeniably favorable portents.