Natural Res. Beats by a Penny - Analyst Blog

Natural Resource Partners L.P. (NRP) recorded adjusted net income of 36 cents per unit in the third quarter ended September 30, 2010, beating the Zacks Consensus Estimate by a penny. Adjusted net income in the quarter remained in line with the third quarter of 2009. The outperformance was driven by improved coal markets, which led to record revenues in the quarter.

On a GAAP basis, the partnership reported net income per unit of 51 cents compared with 36 cents in the year-ago quarter.

Revenue

Natural Resource Partners' total revenue was a record $80.8 million, soaring 26% year over year, driven by both higher coal production and realized prices. Revenue in the quarter also increased compared with the Zacks Consensus Estimate of $74 million.

Coal production in the quarter jumped 10% year over year to 12.4 million tons. Revenues in the form of coal royalty increased 22% to $60.1 million and revenues other than coal royalties upped 41% to $20.6 million in the third quarter 2010. Average coal royalty per ton upped 11% to $4.86, with NRP's lessees realizing higher prices for both steam and metallurgical coal in the third quarter.

Total Appalachian region posted a 14.8% year-over-year growth to reach $48.8 million of coal royalty revenues. Coal royalty revenues at the Illinois Basin and the Northern Powder River Basin increased 72% and 42.9%, respectively, to $9.3 million and $2.0 million.

Costs

Operating costs were $30.4 million in the quarter, a 34.5% improvement from $22.6 million in the year-ago quarter mainly due to higher depreciation, depletion and amortization and general and administrative expenses.

General and administrative expenses in third quarter 2010 rose $4.2 million over third quarter 2009, due to increased accruals on the long-term incentive plan associated with the increase in NRP's unit price and additional expenses related to the venture with International Paper.

Financial Position and Acquisitions

During the quarter, Natural Resource Partners took steps to simplify its corporate structure. The partnership issued 32 million units to the holders of the incentive distribution rights in exchange for the permanent retirement of those rights, also lowering Natural Resource Partners' cost of capital, which is critical to completion of acquisitions and growing the partnership's cash flows and distributions.

Following the end of the third quarter, Natural Resource Partners completed the third acquisition of the coal reserves associated with the Deer Run mine in the Illinois Basin. This property, currently under development, will increase coal royalty production for the partnership in 2011 and dramatically increase production in 2012 as the longwall production commences.

As of September 30, 2010, Natural Resource Partners had cash and cash equivalents of $72.2 compared with $82.6 million as of December 31, 2010. The partnership's liquidity was also strong at quarter-end with $261 million available under its credit facility. The company generated cash flows of 62.1 million from operating activities in the quarter, up from $38.1 million in the year-ago quarter.

Natural Resource Partners' distributable cash flow increased 80% year over year to $24.2 million driven by a hike in revenues and increase in receipts of minimum royalties year over year.

Outlook

Natural Resource Partners had adjusted its guidance range for 2010 at the end of the second quarter of 2010. Based on continued price increases in the third quarter the company expects to meet or exceed all ranges, except production which is expected lie somewhere between the range.

The partnership had provided revenue guidance of $265-$295 million for 2010, with coal royalty revenues guided in the range of $195-$210 million. Total coal production was guided in the range of 42-48 million tons.

In addition, Natural Resource Partners boosted its 2010 net income per unit expectation by 30-40 cents to 1.40 to $1.50. Of the increase, about 15-20 cents is due to the elimination of the incentive distribution rights that occurred during the third quarter.