This week, we are reviewing a natural resource company who has spent the last few years diversifying and broadening its revenue sources. A few years ago, Natural Resource Partners L.P., derived almost 100% of its revenues from royalty payments from coal producers mining the land and mineral rights it owned across several regions in the United States. Smartly, the company saw the decline in coal and began its diversification strategy, acquiring a construction aggregate producer, a large stake in a soda ash refinery as well as oil and natural gas producing properties in some of the most lucrative, domestic oil and gas plays in the country. The strategy has paid off, and at its last reported quarter (ending 9/30/2015), NRP reported 56% of its revenues came from non-coal related sources for the first nine months of 2015. Although coal prices have continued to decline, this diversification has helped to stabilize the company and increase revenues.
In January, the company declared that it expects distributable cash flow and EBITDA for year end 2015 to exceed the upper range of its August 2015 guidance. With those figures, the company is moving from roughly 2x EBITDA / interest coverage to nearly 3x coverage, all within an extremely challenging commodities environment. When deeply discounted to around 51, these relatively short 32 month bonds, couponed at 9.125%, are indicating a yield to maturity that’s over 41%. From our experience, it is very rare to such a stunning yield as this with a company that has nearly 3x EBITDA / interest coverage. Therefore, we are targeting these extremely high-yield, high cash flow bonds for addition to our high yield global income portfolios, FX1 and FX2.
About the Issuer
Natural Resource Partners LP is a master limited partnership headquartered in Houston Texas. NRP is a diversified natural resource company that owns interests in oil and gas, coal, aggregates and industrial minerals across the United States. A large percentage of NRP’s revenues are generated from royalties and other passive income. NRP is not an active coal producer. Instead, they lease the land they own to operators who then mine and produce the coal to be sold at market. Thus, they do not bear the risk of bringing the coal to market. This means that even if the coal mining company (the lessee) fails, there is likely two or three companies behind them who will step in (and pay NRP) to mine the same property. Last year, coal was responsible for generating nearly a third of the electricity in the U.S., so it is still a commodity in demand.
In addition to the land and mineral rights, NRP owns a 49% equity investment in Ciner Wyoming LLC, a trona / soda ash operation, owns working interests in oil and gas properties and as of October 2014, owns VantaCore, a construction aggregate business, making NRP one of the top 25 aggregates producers in the United States.
In 2012, Natural Resource Partners business was almost exclusively related to coal, with approximately 94% of its EBITDA coming from coal related operations. The company leases the coal reserves it owns to experienced mining operators under long-term leases that grant the operators the right to mine and sell the reserves in exchange for royalty payments. Aware of coal’s decreasing favor in light of its environmental impacts, NRP began diversifying. Its efforts to move away from coal have proved fruitful. At the end of 2014, the partnerships non-coal business went from 6% of EBITDA to roughly 37%. As of September 30, 2015, revenues from sources other than coal represented 56% of total revenues as compared to 34% of total revenues in the first nine months of 2014.
Today, NRP owns interests in several different operations and industries. They now own a 49% interest in Ciner Wyoming, a trona ore mining and soda ash refinery in the Green River Basin in Wyoming. Soda ash is used in making many consumer products like glass, chemicals, soap and paper. In addition, NRP has invested in various interests in oil and gas properties, mostly in mineral and royalty interests. Also, the company now owns or leases aggregate and industrial minerals in various states across the country. Most notably, they acquired VantaCore, a construction aggregate business in October 2014. VantaCore has contributed greatly to NRP’s diversification. For the nine months ending September 30, 2014, it was responsible for 34% of total revenues. VantaCore produces construction aggregates (sand, gravel, limestone) used in three different end markets – public infrastructure, residential construction and commercial construction.
Reducing Costs and Debt
As NRP strived to diversify its operations through acquisitions, the price of coal continued to decline. Also, as oil and gas was one of the industries the company added to its balance sheet, the company has also battled declining prices in that space as well. In response to this, the company introduced a strategic plan to lower costs and improve its balance sheet. The company thus far has reduced debt by $66 million in 2015, reduced its quarterly unitholder distribution by 87%, and is reducing its coal related workforce by 15%. In addition, the company has commenced reviewing its asset portfolio to sell assets to raise cash (the company has mineral rights on its balance sheet valued at $1.15 billion) in order to stay on track towards its goal of deleveraging.
Although NRP is exposed to commodity volatility, the company posted a better-than-expected third quarter in 2015. Adjusted EBITDA increased 15% or 10.0 million to $78.5 million in the three months ending September 30, 2015, primarily due to the inclusion of VantaCore and oil production from the Sanish Field in North Dakota. For Q3, revenues also increased 37% year-over-year and for the first nine months of 2015, revenues increased 42% year-over-year.
The addition of the Sanish Field, which NRP purchased in late 2014, has not only helped to diversify NRP’s holdings, but it has also provided increased revenues. In April 2015, the company also announced a cost reduction and deleveraging initiative to strengthen the company’s balance sheet. As a result, over the first nine months of 2015, NRP decreased its net debt by $66 million. For the first nine months of 2015, oil and gas revenues increased by 13% as compared to the same period in 2014. This increase was mainly attributable to higher production volumes, including the Sanish Field. Considering the company’s Q2 and Q3 2015 results, the diversification and cost reduction strategies of NRP appear to be working.
NRP had operating income in the first nine months of 2015 of $$150,688 (excluding a one-time impairment charge in Q3 of $614.3 million) and interest expense of $69,997, for an interest coverage ratio of 2.15x. In addition, as of September 30, 2015, the company had a total liquidity of $76 million.
The default risk is NRP’s ability to perform. As the price of coal has continued to decline over the past five years affecting the company’s royalty revenues, NRP has intelligently diversified its holdings, now deriving over half of its revenues from sources not linked to coal. Its acquisition of VantaCore should continue to provide organic growth, as US infrastructure spending is expected to grow 3% annually (on average) over the next decade. In addition, new construction starts in 2016 are also projected to grow by 6% in 2016, which can directly benefit VantaCore’s revenues.
Although NRP is not a direct operator on coal mines and oil wells, it is exposed to price fluctuations on these commodities as its royalty payments from coal and oil producers is linked to the prices of coal and oil. And although coal has seen an almost steady decline in price over thee past five years, coal still provides nearly a third of the electricity in the US. In addition, the price of oil is nearly a quarter of what it was at its high in mid-2014. However, NRP has also added natural gas wells through its diversification, and the US Energy Information Administration is projecting natural gas prices to increase over 30% in 2016, which will directly benefit revenues for NRP.
Summary and Conclusion
Natural Resource Partners has done an outstanding job over the past few years of diversifying its business beyond royalties from coal producers. In the space of three years it has transitioned from generating nearly all of its revenues from coal related royalties, to generating over half of its revenues from non-coal sources. The company is well positioned to take advantage of the growth in infrastructure and new construction in 2016 as well as increasing natural gas prices. Combined with its cost reduction and deleveraging initiatives, NRP is in the process of redefining its business. We see this outstanding 41+% yield from a company with nearly 3x interest coverage as a must-have for investors looking to increase their overall portfolio cash flow and yield. Therefore, we have marked these short 32 month bonds from Natural Resource Partners for addition to our Fixed-Income1.com and Fixed-Income2.com income portfolios.
Issuer: Natural Resource Partners LP
Ratings: B3 / B
Yield to Maturity: ~41.4%
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Disclosure: Durig Capital and certain clients may have positions in Natural Resource Partner’s 2018 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail client
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