Rhino Resource Partners, L.P. (RNO), Walter Energy, Inc. (WLT): One High Yielding Coal Stock That Might Make Sense

Investors should probably avoid Walter Energy, Inc. (NYSE:WLT) and the anchor of high debt that is holding it back. Although Peabody Energy Corporation (NYSE:BTU) is projecting weak coal pricing and low demand to lead to a drop in third quarter earnings, and perhaps even a share net loss, it has the financial liquidity to maintain its dividend and make it through this rough patch. It’s a far better option than Walter. With a yield of only about 1.9%, however, it won’t excite most income investors.

The best of both worlds?

Debt at Rhino Resource Partners, L.P. (NYSE:RNO) makes up just a third of the partnership’s capital structure and debt payments represented just 3% of sales. Although Rhino Resource Partners, L.P. (NYSE:RNO) has also had to reduce production and focus on controlling costs, debt hasn’t been a big issue.

Yet the company’s decision to trim its quarterly distribution by about 8% in late 2012, and Wexford Capital, the general partner, making the choice to stop taking incentive distributions both look like warning signs of financial weakness. They aren’t. The money that would have otherwise gone to Wexford and sustaining a slightly higher dividend have been put to work on growth projects in coal and expansion into oil and natural gas.

These efforts should allow the company to prosper over the long term. For example, oil and gas revenues jumped almost 300% between the first and second quarters. That should add nearly $2 million to the top line through the rest of the year, helping to offset weakness on the coal side. And, Rhino Resource Partners, L.P. (NYSE:RNO) is on track to start production at a new mine in 2014. That mine already has enough sales commitments that it will add to the top and bottom lines when it opens in the middle of next year.

Rhino Resource Partners, L.P. (NYSE:RNO) “remains poised to ramp up production” when conditions warrant. With low debt and growth projects in the works, it remains in growth mode. Income investors and those seeking a turnaround should take a look at this high-yielding coal play. With coal market weakness likely to last at least through the end of this year, it’s better to focus on a financially strong participant than a company with lots of leverage like Walter.

The article 1 High Yielding Coal Stock That Might Make Sense originally appeared on Fool.com is written by Reuben Brewer.

Reuben Brewer has a position in Rhino Resource Partners. The Motley Fool has no position in any of the stocks mentioned. 

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