PVR Partners LP (PVR), Natural Resource Partners LP (NRP): This Company Is Changing Its Stripes

A Dividend Cut

Based on PVR’s lofty dividend yield, the market isn’t convinced it can make the shift and maintain its distribution. That shouldn’t be surprising, since it hasn’t covered its distribution comfortably for a little while and there has been some weakness in both its coal and pipeline businesses. And there is a precedent for a dividend cut.

Inergy, L.P. (NYSE:NRGY) made a similar shift, moving from its legacy business of propane distribution to natural gas pipelines. Along the way, it undertook several corporate transactions that, in hindsight, seemed to make the move more complex then needed.

First it built a pipeline business. Then it spun off most of its pipeline assets to Inergy Midstream LP (NYSE:NRGM), leaving Inergy holding the legacy propane business and a stake in Inergy Midstream. Then it sold the propane business to Suburban Propane Partners LP (NYSE:SPH). This left Inergy with few assets and its ownership in Inergy Midstream. Essentially it is now the general partner of its independent midstream assets. A large dividend cut came with all of those transactions, leaving Inergy unit holders to wonder if it was all worth it.

A Different Tale

PVR doesn’t appear to be heading down the same path as Inergy. However, management has publicly stated that it doesn’t want to grow the coal business. That leaves a spin off or sale on the table, since the business is, effectively, a depleting asset if PVR doesn’t expand its property portfolio.

That said, so far this year the CEO has purchased 25,000 shares of PVR on the open market, with smaller purchases made by the CFO, General Counsel, and a company director. Such open market purchases are a vote of confidence in a company’s future. Moreover, the company has continued to increase its dividend in recent quarters, which is also a sign of support.

A Worthwhile Risk

While there is always the risk of a dividend cut when a company makes a big transition, PVR has a high quality asset base and numerous internal expansion efforts under way. With such a high yield, it is a worthwhile investment for those willing to bet with management that the shift to natural gas pipelines makes PVR a stronger company over the long term.

The article This Company Is Changing Its Stripes originally appeared on Fool.com and is written by Reuben Gregg Brewer.

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