Alliance Resource Partners, L.P. (ARLP), Natural Resource Partners LP (NRP), Rhino Resource Partners, L.P. (RNO): Income Plays in Coal

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The coal industry has been hammered by low natural gas prices. However, 2013 is likely to be the year in which the industry starts to turn if early trends continue. Income investors should take a look at coal focused Alliance Resource Partners, L.P. (NASDAQ:ARLP), Natural Resource Partners LP (NYSE:NRP), and Rhino Resource Partners, L.P. (NYSE:RNO).

Alliance Resource Partners, L.P.

A changed market

Low gas prices led to a decline in coal demand and prices. However, gas prices have headed higher lately. That’s changing things in a big way. For example, according to U.S. coal giant Peabody Energy Corporation (NYSE:BTU), power generated by natural gas was down nearly 15% through April, while coal generated power was up by 11%.

That said, coal shipments declined 7%. While that sounds bad, it actually has a very bright silver lining because inventories at power plants were down 25%. Excessive inventories have been hindering demand. Arch Coal Inc (NYSE:ACI), another large coal player, expects coal stockpiles to be at normal levels by the end of 2013 if current trends continue. That means an uptick in demand is likely.

Long-term positives

There are also long-term positives. For example, Arch highlights that there are plans to build over 500 gigawatts of coal fired energy capacity around the world by 2018. It would require an addition 1.5 billion tonnes of coal to power those plants. Moreover, the company highlights that the U.S. coal power fleet is running 25% below the level seen just five years ago. Even if there are U.S. coal plant closures, increased utilization could easily offset the drop in demand from the closures.

While Arch and Peabody are good companies in the coal space, neither offers a notable dividend yield. Income investors should favor limited partnerships (LPs) in this space. Here are a few:

The best operator

Alliance Resource Partners, L.P. (NASDAQ:ARLP) is among the best companies in the coal space. It is the largest limited partnership dedicated to mining coal. And, despite the weak coal backdrop, Alliance posted record revenue in 2012 and expects to repeat the feat in 2013. Volume growth is the reason.

There are two takeaways from this. First, the company is easily handling one of the most difficult periods for coal in recent memory. Second, it continues to invest in its business and hasn’t pulled back on growth. That means that it will be a stronger company when coal demand and prices recover.

Alliance Resource Partners, L.P. (NASDAQ:ARLP) has increased its dividend on a regular basis for years, and right through the current industry difficulty. With a recent yield of around 6.30%, it isn’t the highest yielding LP dedicated to coal, but it is probably the safest option.

No mining here

Natural Resource Partners LP (NYSE:NRP) is an interesting play on coal because it doesn’t actually mine coal. It owns coal properties that it leases out to miners. That removes many of the biggest risks of coal mining, including mine safety and environmental regulation. While the LP’s results are still subject to the performance of the mines, its unique business model is worth examining.

The top line was essentially flat year over year in 2012 and bottom line results were solid. The distribution was higher, too, though it hasn’t been increased in six quarters. Still, with a yield of nearly 10%, this is a good option for income seekers.

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