by Aaron Levitt | April 8, 2014 2:10 pm
For investors in James River Coal (JRCC), it’s been a long painful road. And most other coal stocks aren’t faring much better.
After peaking at nearly $60 back in 2008, JRCC stock is currently trading for about 35 cents as the coal producer has missed a critical debt payment and filed for bankruptcy. At the end of the day, JRCC has struggled against the back drop of low-priced and abundant natural gas as well as a tough regulatory environment for coal stocks.
That same struggle has been felt industry wide, and coal stocks are still sitting near historic lows, which may give some investors the idea to pull the trigger and load up on the hated sector.
Don’t do it — at least, not on the major coal producers like Peabody Energy (BTU).
The best place to find profits in coal stocks — along with hefty dividends — is the cheaply priced coal MLPs or master limited partnerships.
Many of the coal MLPs don’t actually mine the fuel source, but are paid a royalty rate as well as “right to mine” leases for the coal on their land. With zero real expenses, the coal MLPs are able to kick out hefty distributions to their unit holders.
For investors looking to play the continued dip in coal stocks, the MLPs are the only way to go. Here are three of the best picks.
Distribution Yield: 8.7%
The recent dividend cut from Natural Resource Partners (NRP) may give investors pause. But the truth is, the dividend cut isn’t as bad as it seems, and it could actually be a huge buying opportunity.
First, NRP holds approximately 2.3 billion tons of proven and probable coal reserves and approximately 500 million tons of aggregate reserves. Instead of mining the product itself, Natural Resource leases its lands to third-party coal producers. In return, the partnership collects royalty payments. Currently, NRP’s lessees control approximately 25% of metallurgical coal production in the U.S.
While business has slowed, it still is pretty profitable for NRP, as it doesn’t have the costs associated with physical mining. Likewise, many of its leases come with take-or-pay contracts.
NRP’s growth and the reason for the cut in its dividend has to do with natural gas, but in a good way. NRP has expanded in owning oil and gas properties through non-working interests. The dividend cut was done to provide more working capital in order to plow deeper into the natural gas space. NRP is working on transforming itself from just a pure coal-player.
Ultimately, that will help NRP become a more diversified energy stock and boost its already hefty 8.7% distribution further into the future.
Distribution Yield: 12.8%
Unlike NRP, rival Rhino Resource Partners (RNO) does most of the mining on its properties. Also unlike NRP and several other coal stocks and MLPs, RNO isn’t diving head-first into natural production.
In fact, the company is selling its natural gas stakes.
At first blush that may seem like a bone-headed idea. After all, natural gas is the future. Yet, it’s actually pretty darn smart for the MLP’s unit holders.
JRCC’s bankruptcy and the woes of many coal stocks have been a result of high debt loads. Many miners added exposure at just the wrong time and now are struggling to right their ships. However, by selling its gas assets, RNO is now basically debt-free.
For shareholders of RNO, that does two things. First, it makes that 12.8% dividend a bit safer to own, as any money going towards debt reduction can now be plowed back into investors’ pockets. At the same time, the sale allows RNO the ability to look for opportunities to expand in both coal and other energy assets. JRCC had some good assets, and snagging them at fire-sale prices would be a good deal for RNO.
Investors seem to like the firm’s prospects and debt-reduction moves. Shares of RNO have risen about 11% in the past month.
Distribution Yield: 5.6%
Based on Alliance Resource Partners (ARLP) continued positive results and surging share price, you would never know that the coal sector is going through a major crisis right now. Unlike JRCC, the firm posted record results for the 13th consecutive year. Its latest results showed that for the full year of 2013, Alliance managed to grow its revenue by 8.4% and earnings by 18%.
That’s a stark contrast to the rest of the coal sector.
The reason for the outperformance over other coal stocks has to do with ARLP’s geographic advantage. The coal miner has 11 mines in the Illinois Basin and Northern Appalachian regions. Pricing for coal from these two areas remain high, while costs to produce remain low. The Illinois Basin features some of the cheapest mine costs around.
As such, ARLP has been able to continuously report great revenues and sales volumes, while other coal stocks have stumbled.
It’s also been great for shareholders of ARLP. Alliance currently yields a juicy 5.6% and has raised its dividend for the last 22 consecutive quarters.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/04/coal-stocks-mlps-arlp-rno-nrp/
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