PVR Partners LP (NYSE:PVR)’ pipeline business has ramped up more slowly than expected this year. However, management believes pipeline volumes will hit internal goals by the start of 2014. And a recent deal with Hess Corp. (NYSE:HES) should support growth next year and into 2015.
A changing business
PVR Partners LP (NYSE:PVR) has been adjusting its makeup lately, shifting away from its coal royalty business, which was once its sole focus. For 2013 coal is projected to represent less than a quarter of the partnership’s earnings before interest, taxes, depreciation, and amortization. It was as high as 60% just two years ago.
In fact, coal is on the back burner right now because management believes the pipeline business will provide better long-term returns. That’s a similar choice to CONSOL Energy Inc. (NYSE:CNX), which has operations in coal mining and natural gas drilling. In the past decade, CONSOL Energy Inc. (NYSE:CNX)’s natural gas volumes have more than tripled. It expects another 25% increase in production between 2013 and 2014.
Capital spending at CONSOL Energy Inc. (NYSE:CNX)’s coal operations, meanwhile, is currently set at “maintenance” levels. Free cash flow has been earmarked for the natural gas segment. In other words, coal will continue to shrink as a percentage of the company’s business. That sounds pretty good, since weak coal markets effectively dragged the company’s second quarter results into the red.
Coal is alright, gas not so much
So, PVR Partners LP (NYSE:PVR) isn’t alone in its shift away from the coal arena. However, the partnership’s coal operations have performed as expected this year while its pipelines have lagged because of slower than expected well hookups. The slow pace isn’t because of lost business but merely a factor of delayed drilling and connection activity. So, management believes volumes will still hit year end targets.
That means that 2013 is probably going to be a little rough versus early year expectations, but that 2014 should be much better. And a recent deal inked with Hess sets up further growth in the second half. The project is for a gathering pipeline that should begin operations in mid 2014. Moreover, PVR Partners LP (NYSE:PVR) believes that it will be able to contract with other drillers for use of the pipeline as it’s built out.
So, Hess Corp. (NYSE:HES) is providing the foundation with growth potential coming from additional partners. Assuming timely completion of the project, that sets the stage for growth in 2014 and 2015.