Natural Resource Partners L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. NRP owns, operates, manages and leases U.S. mineral and natural-resource interests, including coal, aggregates, oil and gas, and a 49% interest in OCI Wyoming. The 2014 VantaCore and Sanish Field acquisitions materially broadened its operating mix.
Financial results and liquidity
- Revenue and other income: $109.7 million, up 36.6% from $80.3 million. Aggregates revenue was $28.9 million versus $3.4 million, largely reflecting VantaCore; oil and gas revenue rose 51% to $15.2 million, primarily from Sanish Field. Coal-related revenue declined 6% to $49.5 million.
- Profit: Operating income was $40.4 million, down from $52.4 million. Net income was $17.5 million versus $32.6 million; net income per common unit was $0.14 versus $0.29.
- Adjusted EBITDA: $64.2 million, down about 7% from $69.0 million. Management cited lower coal-related revenue and lower margins in the acquired aggregates business.
- Cash flow: Operating cash flow was $55.5 million versus $38.6 million. Distributable cash flow, a non-GAAP measure, was $53.3 million versus $38.9 million; the 2015 figure included asset-sale proceeds and deducted $8.5 million of maintenance capital expenditures. Investing used $11.9 million; financing used $60.4 million. Cash fell to $33.3 million from $50.1 million.
- Debt and liquidity: Debt and affiliate debt totaled $1.459 billion at quarter-end, including $156.0 million classified as current. Total assets were $2.394 billion and partners’ capital was $693.7 million. NRP reported $102 million of combined revolver capacity at March 31; after the oil-and-gas borrowing base was reduced and $5 million repaid in April, combined available capacity was $75 million. Current liabilities exceeded current assets by approximately $123 million.
- Interest and distributions: Interest expense was $22.9 million, up from $19.9 million. NRP paid a $0.35-per-unit distribution in February; in April, it declared a Q1 distribution of $0.09 per unit, a 75% reduction from the prior-quarter rate.
Material changes and management outlook
- Non-coal sources represented 55% of revenue and other income, versus 35% a year earlier, reflecting diversification. Management noted that VantaCore adds revenue but operates at lower margins than royalty businesses.
- Coal royalty production fell 9% and coal royalty revenue fell 15%. Management expected weak thermal coal markets through 2015 and did not anticipate a 2015 recovery in metallurgical coal prices; prolonged weakness could lead to mine idlings or lessee mine closures and impairments.
- Management expected long-term growth in Illinois Basin revenue, while noting Q1 production and royalty revenue declined. OCI Wyoming performed in line with expectations; its equity earnings increased to $12.5 million, though its cash distributions to NRP were $10.9 million versus $11.6 million.
- VantaCore faced winter-weather disruption and seasonal demand patterns; management also expected its Laurel Aggregates operation to be affected by slower Marcellus and Utica exploration and development. Oil and gas prices remained depressed. NRP had not hedged future oil or gas production and said it would assess Williston Basin well proposals individually to manage capital spending.
- Management’s announced plan was to reduce debt and strengthen liquidity, using distribution savings to repay Opco debt. Opco’s revolver matures in August 2016 and its $75 million term loan in January 2016; approximately $81 million of Opco senior-note principal is due annually through 2018. NRP also has $425 million of 9.125% notes due in October 2018. Management said refinancing may not be available on acceptable terms, or at all.
Risks, contingencies and unusual items
- Borrowing-base reduction: In April, the NRP Oil and Gas facility borrowing base was cut from $137 million to $105 million; NRP repaid $5 million. Reserve-based borrowing capacity may change at future redeterminations.
- Anadarko claim: NRP disputes Anadarko’s assertion that OCI reorganization transactions accelerated contingent consideration. NRP recorded an $8.8 million accrual for 2015 obligations. If Anadarko prevails, additional payment could be due, up to the agreement’s stated maximum cumulative amount equal to the net present value of $50 million, less a deductible.
- Accounting adjustment: Q1 depletion expense included a $3.8 million credit correcting prior-period oil and gas depletion expense; management judged the error and adjustment immaterial to prior-period statements. VantaCore’s preliminary purchase-price allocation was also adjusted, increasing plant and equipment by $22.5 million and reducing goodwill by the same amount.
- Other exposure: Revenue concentration includes Foresight Energy and affiliates (17% of Q1 revenue and other income); NRP also identified Alpha Natural Resources as a significant lessee. Commodity prices, interest rates, lessee performance, and refinancing access are material risks. A 1% increase in rates would increase annual interest expense by approximately $4.1 million on the $410 million of variable-rate debt outstanding at March 31.
- NRP reported compliance with debt covenants at quarter-end. It reported no material change in previously disclosed risk factors and said ordinary-course legal proceedings were not expected to materially affect its financial position, liquidity or operations.
Important facts for investors to verify
- Whether cash flow and debt reduction can meet the 2016 maturities and scheduled principal payments, and whether refinancing is available on acceptable terms.
- The effects of the reduced oil-and-gas borrowing base and future reserve-based redeterminations on liquidity and capital spending.
- Coal market conditions, production and royalty trends, lessee concentration, and any mine idlings or impairment indicators.
- VantaCore’s seasonal performance, weather recovery and margins, and whether oil and gas price declines offset Sanish Field production gains.
- The outcome of the Anadarko dispute and any contingent consideration beyond the recorded $8.8 million accrual.
- The distribution reduction’s impact on cash retention, debt repayment and future distributions.