My NRP coal partnership got blasted to the tune of 17% after announcing the coal market continued to weaken in 2013, against their expectation. In response to the weak sales of power production and metallurgical coal, NRP’s board announced a 36% reduction in distributions.
This hurts, as I guessed that $20 would average the low mark in the name. Clearly, I was wrong.
I am not selling NRP, though (not yet, at least). My primary reason for buying into NRP was more predicated on coal being a very inexpensive sector to get exposure to and the medium term unlikelihood that the US or global economies will be able to pivot away from coal quickly.
I’ll ride this out for a little bit and see where it goes. There’s been long speculation that NRP may have to cut its distribution, because their debt level is high and their board has ambitious goals to diversify their royalty stream into a variety of commodities, such as raw materials for glass or gas and oil.
The board has reaffirmed they don’t think the partnership is at risk of violating bond covenants, and I think the five year forecast distribution is more likely to contain upside surprises.
NRP is sinking me ~1.5%, which is actually being generously offset by gains elsewhere. NRP was a smaller position than, say, CCJ or BAS. For the day, I am down just ~.5% so far. But we’ll see if NRP doesn’t bleed out hard into the close
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Mr Cain did you ever talk to people in management or know something in general about the business that made this a high probability trade? The ridiculous divvy the horrible price action. Why did this play seem better than the other thousand or so plays all over the world markets? Trying to learn here. Thanxs.
I’ve followed the partnership for a few years, always on the back radar. I rode NRP from about where it’s at today to $30 back before I became a tabbed blogger. So what you see as horrible price action, I see as the culmination of a three year pullback.
The divvy, is ridiculous (was, now it’s at 7%), but even after the cut it’s still above average. And it’s a known coal play that I’ve got some familiarity with.
I was looking for a coal play because the position of most people in this country right now is that coal is dead money and will not recover. Obama and his EPA are coming, etc. etc.
Thank you, sir. In no way was the “ridiculous or horrible” meant to infer anything about your positions. Fucking writing must not be my thing. Bad choice of words. The access to your thoughts are always much appreciated.
You’re fine. I frequently describe my own positions as horrible, when they are busy swinging 20% inside of a month.
There is a thought process here. I am very capable of handling wild price swings, and they tend to be my favorite places to look for bargains.
Good Sir,
I am a bit confused as to why you own Coal, Nat Gas, and Nuclear. It seems to me like you are betting on too many horses in the race.
Also, I’m a bit skeptical that NRP will be able to reduce their debt as they say, even with the .2 distribution cut. The cut is equal to ~88m per year, but their debt has been growing faster than that on avg. for the last 5 years. They even mentioned more acquisitions to come, which seems reckless given their current debt/equity raito.
Compare the market caps of NRP and ARLP. Then compare their revenue and earnings. I think you’re lucky it only fell 17%.
I understand that position.
Let me preface by saying I do not own natural gas. I own two companies that stand to benefit greatly by way of other companies that own natural gas, choosing to increase extraction of the resource through a specific method – fracking. This is different in several respects than being long natural gas.
I own coal and nuclear because I am a net believer that energy needs will be greater over the next two decades, not less. And that the old ways of satisfying those needs will be more relevant than the solar and wind methods.
My opinion is that pricing for most resources will normalize to each other. If environmentalists win and force wind and solar into the grid, this will likely give existing energy companies the freedom to jack prices higher, towards the new competitors. Which in turn gives nuclear and coal (in existing operations) the freedom to hike prices and make windfall profits.
Natural gas extraction will benefit as new plants are built and existing plants convert, increasing demand.
For different reasons, I feel each of the specific companies or sectors I own is undervalued. Coal because people have overreacting to what is obviously a trend of shifting away from coal long term. Natural gas extraction because fears of the natural gas glut destroying the market were overblown. And nuclear because fears of Fukashima destroying the nuclear industry, completing a trend of nuclear restriction that has dominated the planet since Chernobyl and 3 Mile Island, were off mark.
I hope you are accounting for the increased efficiencies in new and existing power plants (Cogeneration) and transmission lines (Smart grid).
Anyway, I’m a bit concerned at the valuation of NRP compared to ARLP. At current prices there’s only a 2% difference in yield between the two, which is not nearly enough, IMO. (Given the variance between forward P/E and Debt/Equity between the two)
You’re right, NRP is more expensive.