Coal landholder Natural Resource Partners LP (NYSE: NRP), amidst an historically lousy coal market, on Aug. 6 reported revenues of $90.7m and net income per unit of $0.46 for the second quarter 2012.
“As reflected in our second quarter results, our coal lessees are performing better than the industry as a whole in this weak market,” said Nick Carter, President and COO. “Our emphasis on metallurgical coal and our expansion into the Illinois Basin helped through the first half of this year when the thermal market has been under pressure from low natural gas prices, mild winter weather, and regulatory pressures. We also benefitted from our recent diversification efforts, as our revenues other than coal royalties increased by 10% over the second quarter of 2011.”
Total revenues for the second quarter were $90.7m, a decline of 6% from the second quarter 2011. While quarterly coal production remained flat compared to second quarter 2011, coal royalty revenues decreased 12%, quarter over quarter, to $62.9m. The decline in coal royalty revenues was partially due to a greater proportion of production coming from yjr Illinois properties that sell at lower prices, some new production from properties on old leases with very low royalty rates and some decline in overall prices. This decline was partially offset by a $2.5m, or 10%, increase in revenues other than coal royalty revenues to $27.8m, mainly due to increases in infrastructure fees resulting from additional throughput, increases in oil and gas revenues due to lease bonuses and an increase in gain on sales of assets.
Total revenues for the first six months of this year increased 1% over the 2011 period to $182.5m. While coal royalty revenues declined about 10% due to $0.60 per ton lower coal royalty realizations, other revenues more than offset that decline. The lower realizations per ton resulted from lower prices received in Appalachia on both thermal and met coal and new production offsetting the decline in Central Appalachia production that receives lower prices. Met coal accounted for 33% of NRP’s production and 45% of its coal royalty revenues for the first six months of 2012 compared to 37% of production and 47% of coal royalty revenues in 2011.
Revenues other than coal royalty revenues increased $15.0 million from the first six months of 2011 to $59.7m mainly due to a $9.6m minimum recognized as revenue in the first quarter on the shut Gatling Ohio property, which is controlled by coal operator Chris Cline. In addition, overriding royalties increased $2.1m due to increased production on override properties and the new Sugar Camp override purchased late in the first quarter 2012. Sugar Camp is a new Cline longwall mine in Illinois.
Gas prices rising, but not high enough yet to be of much benefit to coal
“The current thermal coal market continues to be weak,” said Carter. “Beginning in early 2012, due to low natural gas prices, gas fired plants began to substitute for coal fired plants in electricity generation. In addition, unusually warm winter weather, combined with governmental regulations, decreased overall demand and created large stockpiles of coal at the utilities. The coal industry has responded with reduced production. While natural gas prices have risen in recent months, they are still not to the level to cause significant switching back to coal fired power plants. However, the unusually warm weather experienced over the last month across much of the Mid Atlantic and Northeast has caused some previously idled coal plants to be brought back on line. As the market slowly recovers, our focus on Illinois Basin thermal coal should benefit us because we believe that the Illinois Basin will recover ahead of Central Appalachia.”
Carter added that the met coal market, while significantly stronger than the thermal market, has seen some softening recently due to a slowing of the Asian economies resulting in a slight slowdown in steel production. “We are, however, waiting to see the response of the governments in Asia regarding any type of stimulus to spur growth,” Carter added. “Domestic metallurgical coal demand was strong in the first half of the year mainly due to strong automobile manufacturing, but there have been signs of slight weakening recently. On a more positive note, we have experienced unprecedented exports of both thermal and metallurgical coal this year, putting the country on track to have another record year for exports of coal.”
As of June 30, NRP had $227m in available capacity under its credit facility and approximately $122 m in cash. The final $40m acquisition of Hillsboro reserves in the Illinois Basin will occur in August 2012 when the longwall commences operation. Hillsboro is another Cline longwall mine development project in Illinois.
NRP is now projecting coal production of 48 million to 54 million tons in 2012, against original guidance of 52 million to 58 million tons. While coal royalty revenues are forecasted to be lower than originally forecast, revenues other than coal royalty are forecasted to offset much of this decline. NRP is now lowering the midpoint of the range of total revenues by approximately $5m and net income by $0.05 per unit.
NRP is a master limited partnership headquartered in Houston, with its operations headquarters in Huntington, W.Va. NRP is principally engaged in the business of owning and managing mineral reserve properties.