Energy MLPs are typically tied to oil & gas pipelines, storage facilities, ports and rail, i.e. infrastructure projects. Natural Resource Partners LP (NRP) is one of only a few largely coal-related MLPs. The other coal MLP that I like is Alliance Resource Partners, L.P. (NASDAQ:ARLP). Unlike Natural Resource Partners, Alliance Resource Partners, L.P. (NASDAQ:ARLP) is a coal producer. By sticking to its knitting and avoiding the urge to merge that sunk a number of coal producers in 2011, Alliance is now the best of the bunch in terms of production growth and margins.
Natural Resource Partners’s revenue guidance for 2013 is about $360 million, which would be down nearly 5% from 2012. While disappointing, a 5% decline in revenues would be modest given the dramatic decline in the coal markets. Natural Resource Partners’s ability to withstand the coal market storm is a testament to its diversification strategy.
Why Should One Invest In a MLP with Zero Distribution Growth?
Although Natural Resource Partners is not increasing its annual distribution, and probably won’t increase it for at least another year, the Company’s 9.5% yield is hard to beat. Compare that to today’s 5-yr Treasury bond yielding less than 1%. High yielding utility, healthcare and telecom stocks are yielding 3%-5%.
Yield Today, Growth Tomorrow
Even if Natural Resource Partners does not increase its distribution for the next two years, I would argue it’s still a good investment. The Company has well over $100 million of cash on the balance sheet, enough to fully cover 2 quarters of distributions. The risk of a distribution cut is quite low.
Conclusion
As Natural Resource Partners emerges from the coal market swoon alive and well, I think the distribution yield that investors require could fall to 7%-8%. At 7.5%, on a flat $2.20 annual distribution, that would equate to a unit price of $29.33 and a total return of 25% over a 1-yr time horizon. In a year or two, if Natural Resource Partners starts increasing its distribution again, the unit price could rise well into the $30’s. This is an investment that could easily return 20% + for two years in a row.
The article Natural Resource Partners’ Safe, Strong 9.5% Yield originally appeared on Fool.com.
Peter Epstein owns shares of Alpha Natural Resources, Alliance Resource Partners, L.P., and Natural Resource Partners LP. The Motley Fool recommends Alliance Resource Partners, L.P.. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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