PVR Partners LP (NYSE:PVR) is making a change from coal to natural gas pipelines. This shift coupled with the still weak coal market has left the market concerned about the limited partnership’s distribution. Management, however, seems pretty confident that it won’t be an issue.
Out with the Old
PVR Partners LP (NYSE:PVR)’s history in the coal industry dates back to 1882. Up until a few years ago, coal was its primary business. The company doesn’t mine coal, however, it only leases coal properties. So, it doesn’t take on the inherent risks of running a coal business. It’s more of a toll taker.
That makes the company’s coal operations particularly high margin. However, coal is facing a number of headwinds. Coal is largely considered a dirty fuel source, which pits environmentalists against it. Also, electric utilities are the primary customers for coal, and new environmental regulations have made it increasingly more expensive to run and build coal fired plants.
More recently, new natural gas drilling techniques have resulted in gas prices falling to historic lows. With gas now competitively priced versus coal, more utilities are switching to cleaner burning gas. With reduced demand, coal prices have fallen. A double whammy that has left the coal industry, including PVR Partners LP (NYSE:PVR), struggling.
In with the New
Seeing the writing on the wall several years ago, and looking to diversify away from coal, PVR Partners LP (NYSE:PVR) started leveraging its coal assets to build a natural gas pipeline business. A logical step since coal provides such wide margins.
In fact, Natural Resource Partners LP (NYSE:NRP) is doing something similar. Although this coal leaser is still highly committed to coal, it has been branching out into other natural resource categories. A key difference, however, is that Natural Resource Partners LP (NYSE:NRP) is keeping its focus on owning properties that it leases out. So it has purchased land that can be drilled by others for natural gas, but it isn’t turning into a pipeline company.
That key difference could make PVR Partners LP (NYSE:PVR) a less risky long-term investment because it won’t be as dependent on commodity prices. That said, PVR Partners LP (NYSE:PVR) is making a big business shift. It is one thing to lease out coal properties and a totally different thing to own and build natural gas pipelines. Of course the company has made good use of acquisitions to quickly build this business, but that can just increase the complexity of changing gears.