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PVR Partners LP (PVR), Natural Resource Partners LP (NRP), Rhino Resource Partners, L.P. (RNO): Is Coal Or Gas Dragging Down This LP?

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Of all of the companies using a coal legacy to shift into natural gas and oil assets, PVR Partners LP (NYSE:PVR) is by far the furthest along. Despite that fact, the partnership’s distributable cash flow (DCF) wasn’t enough to cover its over 9% distribution. Is the partnership’s coal legacy the problem or is the issue its natural gas assets?

In 2011, coal royalties made up almost two thirds of PVR Partners LP (NYSE:PVR)’s revenues. Last year that number had fallen to about 20%. The rest comes from pipelines. That’s a big change and makes the partnership more of a pipeline company than a coal play.

PVR Partners LP (NYSE:PVR)

The power of diversification
There are others following a similar path. For example, Natural Resource Partners LP (NYSE:NRP)’ coal royalty business represented 90% of its top line in 2005 but today is around 70% of the total. The rest comes from mineral interests, coal handling facilities, oil and gas interests, and a soda ash business. Growth of around 15% on that side of the business, plus increased coal volumes, helped the company almost completely offset a 25% decline in the price of coal.

Although revenues falling just 1% in the first half is relatively impressive in a weak coal market, the company’s reduced second half guidance sent the shares lower. The stock yields around 11%. Although the second half is likely to be relatively weak compared to 2012, Natural Resource Partners LP (NYSE:NRP)‘s diversification efforts are paying off and should position the company well for long-term growth. More aggressive income investors should take a look.

PVR Partners LP (NYSE:PVR)’s efforts, meanwhile, were supposed to lead to not just more diversification, but growth as well . That looked like the case from 2009 to 2011, when the top line grew from about $650 million to nearly $1.2 billion and led to a resumption of distribution hikes in mid-2011. However, weak coal markets in 2012 led to a top line decline of around $150 million last year. Coal volume was down over 20% and royalties per tonne were down about 10%, leading the coal business to a revenue drop of around 30%.

Don’t blame coal
It’s no wonder that the coal business has left PVR Partners LP (NYSE:PVR) with something of a stigma. However, so far this year, the coal business is performing in-line with management’s projections. In fact, on the second quarter earnings call, management indicated that it expects coal to be in line for the entire year, as well. Coal isn’t the problem today, it’s the pipelines.

The company’s pipeline volumes, augmented by last years Chief Gathering acquisition, rely on the timing of wells getting connected to the system. That didn’t happen as expected in the first half and the top and bottom lines were soft because of it. Moreover, a water pipeline going to drillers hasn’t seen as much demand as expected.

Worse, the partnership has kept the distribution static so far this year after eight sequential quarterly increases. Although PVR Partners LP (NYSE:PVR) expected to fall short of covering its distribution this year, investors weren’t expecting the weak first half showing and are always displeased when distribution growth is interrupted.

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