What is working for me is pretty obvious to anyone following. HCLP and BAS are setting my year, single handedly. Even factoring in my biggest misses so far, my gains stand back above 10% YTD.
But I’m not going to just steadily publish a slew of feel good pieces, brushing my ugly ducklings under the mat. So this post will focus on them, why they aren’t performing, and what I intend to do about it.
First up is NRP. NRP is a debt ridden resource MLP whose largest assets are comprised of metallurgical coal deposits. The partnership has been hammered since I bought in at $20, currently standing just below $14. Back in January, I cut a lot of this position for around $16, but recently added back above $15. The position stands at around 6% of assets and I have a big loss attached to it.
As for why NRP is down more than 40% this year, there are two big factors driving the outcome. The first is the obvious hatred of all things coal, based on falling global demand and unfriendly domestic politics. The second is that people generally mistrust this position specifically and are betting they’ll have to raise cash through dilutions. The company has a lot of debt coming due.
My opinion is that NRP has already suffered enough to justify the prices at $20, and my opinion hasn’t changed much at $14. I’m not knee jerk afraid of shareholder dilutions and like the steps NRP has taken to diversify their assets away from a pure coal play. I also think coal is set to rebound. In the meantime, even if they slash their distribution by 25%, that would leave it paying out 7% annually, which is far above market yield. However, I will not be adding more until I see market sentiment shift, preferring instead to add other coal related investments and keeping company specific risk low – building my coal thesis out of many smaller parts. BTU is my first secondary choice, and I’ll probably follow up with a third play next year if coal names are still depressed then.
My second ugly child is CCJ. This is kind of amusing, as I really haven’t lost money on CCJ this year. Cameco and related names rallied hard starting around February helping press my gains to 15% early on, and CCJ’s unceremonious relapse was one of the biggest contributors to those gains sliding back below 10% a month ago. CCJ stands at $19, 5-10% below my average cost per share.
CCJ’s problem is also bicausal. The market for uranium remains abysmal, and spot prices have plunged another 20% this year. That’s the pricing for when there are uranium trades at all. My smaller, half scaled position, UEC, made ZERO sales in the first quarter of this year. The market for uranium is near-totally dead. CCJ has largely fended off impact from this pricing issue through their long term supply agreements. However, that can only get you so far.
But CCJ has a second big problem, which is a very large (and growing) deferred (some may say dodged) tax liability to the Canadian government. The price tag is set to cross $1 billion shortly and will probably be almost three years worth of earnings when we’re set and done here. This is why CCJ’s stock is performing so much worse than its dumber, small peers this year.
And I am not at all concerned about CCJ. I’m electing to sit back and do nothing. The tax bill is a non issue. Without question, Canadian corporate governance is much harsher than the US, and there will be consequences for CCJ. They will be made to pay up, and someone will probably get punished. However, even given the magnitude of the bill, it’s hard to see how this changes the stock dynamics.
To put this into perspective, consider APC back when the oil well blew up. People freaked out at the billions of dollars they would owe in damages and bid the stock down an absurd amount. And then, it no longer mattered. The company made a full recovery in a hurry. As then, CCJ’s market prospects look bright on the horizon. They will be made to pay past owed taxes and that hit will sting, but it’s a one time issue and when you consider how stock multiples are priced into shares, the truth is CCJ’s larger problems (business) when worked through will more than totally swallow this blip on the radar. From the perspective of shareholders, at this point and at this price, CCJ’s only problem is the uranium market. The tax liability will be worked through and take care of itself shortly, if only the damn uranium market can recover.
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Cain –
Part of the issue with NRP – and this is based on the above info, as I don’t follow the name – is that since this is an MLP, if they are over levered, they can’t really just pay down debt with newly issued equity, as they will then need to pay distributions on the newly issued equity… They need to find attractive projects to invest in, funded at solid rates, to increase their cash flow. From there, they can begin to pay down debt with that. If the answer is to just cut the distro, the units will get hammered… BWP and EROC had to do this; it was ugly…
This is true, but aside from some tighter laws on distributing earnings, I don’t see how that is materially different from any non-MLP investment in existence.
Fair enough, but it’ll get comped to MLPs (think ARLP?)… may be on or 2 others… Foresight is filed, but not yet trading… will be another comp http://www.sec.gov/cgi-bin/browse-edgar?company=foresight+energy&owner=exclude&action=getcompany
Hmm, that’s a good point. At the point there’s a better buy, I’ll buy better. For the moment, I only have 5% in (thanks to losses), so I’m just not in a hurry.
On a larger point, I’ve just found that debt concerns have been warped by 2008/09. BAS was the same thing – lots of talk on how they were doomed and would be outmaneuvered forever.
Sorry, 6%* in
Also, while the dividend is attractive, there appears to be minimal growth to it…. so while some MLPs offer dividends of 6% and grow them at 6% (total return of circa 12% or so, as they’ll receive a 6% divvie + the units will theoretically increase by 6% so the units remain flat), NRP’s value prop is relatively less attractive.
“the units will theoretically increase by 6% so the units remain flat”
sorry – meant to say so the yield remains flat.
the yield and sub $14 price had me wanting to get in today….of course it opens up 90 cents.
nice pump and dump Cain. (kidding)