I consider myself a hippie, in the modern sense of the word. I recycle, drive an efficient vehicle and compost, so you may not be surprised to hear that I'm not necessarily a big fan of coal from an environmental standpoint. However, I'm not naive enough to fail to recognize that the black stuff is a huge part of how we produce energy. Currently, coal drives about 50% of the electricity created in the United States and, as estimated by the International Energy Agency (IEA), 42% of energy worldwide. 95% of our fossil fuel reserves are locked up in the energy source. In addition, coal was selling at record prices in 2008 and worldwide demand is growing. In fact, the IEA estimates that coal usage will increase about 73% over the next 20 years.
Despite the good news for coal, U.S. President-elect Barack Obama's reputation as an alternative energy bull combined with increasing concerns about the effects of increased regulatory pressure and tight credit markets has left many of companies that produce coal trading for a fraction of what they did just 52 weeks ago. For investors, this could represent a great opportunity to own some solid companies with nice cash flows. (Learn how to tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself in The Essentials Of Cash Flow.)
Enter the Partnerships
One of the more interesting ways to play the coal market is to skip the C-corporations such as Peabody Energy (NYSE:BTU) and take a look at the coal master limited partnerships. These partnerships offer investors juicy, tax-deferred yields while investors wait for a turnaround. Due to the partnership structure, these companies are not subject to double taxation and pass along the savings to investors. (For more insight, see Discover Master Limited Partnerships.)
With its 2.1 billion tons of coal reserves, Natural Resource Partner (NYSE:NRP) makes a compelling long-term case. Currently, Natural Resource Partner's lessees control approximately 25% of metallurgical coal production in the U.S. Instead of mining the product itself, Natural Resource leases its lands to third-party coal producers such as Alpha Natural Resources (NYSE:ANR) and Consol Energy Inc. (NYSE:CNX). In return, the partnership collects royalty payments. These leases are long-term locked contracts and are currently set above 2008 price levels. The land-lease structure allows for low CAPEX requirements. The units yield around 13% and have increased distributions over the last 21 consecutive quarters - by 105% overall. In addition to its coal leases, the company's management has moved the partnership recently into the aggregate resource markets. Often a byproduct of mining, this rock is used in concrete and other infrastructure projects. Natural Resource Partner also produces additional revenue streams from timber and fossil fuel royalties, and transportation fees.
Like Natural Resource Partners, Penn Virginia Resources (NYSE:PVR) also leases its coal properties and does not directly participate in mine operations. At present, the company controls 818 million tons of coal reserves in north and central Appalachia, the San Juan Basin, and Illinois. The partnership has been operating in one form or another since 1882. In addition to its coal operations, Penn Virginia manages natural gas midstream assets including 3,700 miles of transportation pipelines and three gas processing plants. The limited partnership is yielding around 17% and it has raised its dividend 88% since its 2001 IPO. You can also invest in Penn Virginia via its general partner in Penn Virginia G.P. Holdings (NYSE:PVG). The general partnership unit's distribution yield is 16%; this is generated by the distributions received from the PVR partnership interests the company controls. This includes a 19.6 million share stake as well as incentive distribution rights.
Unlike the previous partnerships, Alliance Resource Partners (Nasdaq:ARLP) is a direct producer and is the fifth-largest producer of coal in the Eastern United States. Alliance manages 713 million tons of marketable coal reserves and eight underground mining complexes. The company estimates full-year coal sales to be around 27 million tons and expects to generate revenue of about $1.1 billion. The traded units yield around 11% and the miner has increased distributions 40% since 2006. Alliance's general partner is also publicly traded via Alliance Holdings (Nasdaq:AHGP) and yields 11.3%. (For more on gaining exposure to coal, check out ETFs Provide Easy Access To Energy Commodities.)
Coal is and will continue to be an important piece of the energy puzzle. Long-term trends point to increased usage worldwide and new technologies will help make it cleaner. In the meantime, investors can take an interest in coal limited partnerships and collect some nice dividends while the sector recovers.