Natural Resource Partners L.P. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. NRP owns and operates mineral and natural-resource interests, including coal, soda ash, construction materials, and oil and gas assets. Comparative figures are for Q1 2015 unless otherwise noted.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue and other income | $102.8 million | $109.7 million |
| Income from operations | $47.2 million | $40.4 million |
| Net income | $23.4 million | $17.5 million |
| Net income per common unit | $1.88 | $1.40 |
| Cash provided by operating activities | $19.4 million | $55.5 million |
| Adjusted EBITDA (non-GAAP) | $66.4 million | $64.2 million |
| Distributable Cash Flow (non-GAAP) | $58.4 million | $53.3 million |
Revenue declined 6%, while net income increased. The improvement in reported earnings was significantly affected by $21.9 million of asset-sale gains, principally the $20.3 million gain on oil and gas royalty interests. Operating expenses fell to $55.6 million from $69.3 million, including lower depletion and depreciation; Q1 2016 also included $2.0 million of asset impairments. Interest expense was $23.7 million, up from $22.9 million.
Operating cash flow fell by $36.0 million year over year. Investing activities provided $38.0 million, including $42.7 million of net proceeds from asset sales. Financing activities used $57.1 million, including $51.2 million of debt repayments and $5.6 million of partner distributions. Thus, reported Distributable Cash Flow includes asset-sale proceeds and should not be read as cash generated solely from recurring operations.
Balance sheet, debt, and liquidity
- At March 31, 2016, cash was $52.1 million and total current assets were $119.0 million. NRP reported $62.1 million of liquidity, including $10.0 million of remaining capacity on Opco’s revolving facility.
- Total debt was $1.336 billion at face value and $1.321 billion net of unamortized discounts and issuance costs. Net debt declined from $1.371 billion at December 31, 2015.
- Current debt, net, was $154.4 million, including the $75.0 million NRP Oil and Gas revolving borrowing and scheduled Opco principal payments. Current liabilities exceeded current assets by approximately $84.3 million; excluding the identified near-term debt principal payments, management reported a positive current-asset surplus of approximately $70.2 million.
- NRP has $425 million of 9.125% senior notes due October 2018. Opco had $290 million drawn on its $300 million revolving facility due October 2017 and $544.9 million of private placement notes. Management cited substantial principal payments and the need to improve leverage before refinancing or restructuring debt maturities.
- Opco reported a 3.09x leverage ratio and 5.43x fixed-charge coverage ratio at quarter-end, and was in covenant compliance. Its maximum leverage limit tightens to 3.75x beginning with the quarter ending June 30, 2016, and to 3.5x beginning in 2017.
Changes versus the prior year
- Coal, hard-mineral royalty and other revenue fell 26% to $40.6 million. Coal royalty production declined 27% to 8.1 million tons and coal royalty revenue fell 40% to $22.2 million.
- Soda ash revenue declined 22% to $9.8 million, while equity earnings from Ciner Wyoming declined to $9.8 million from $12.5 million. Management attributed the quarter’s performance partly to operational and production issues.
- VantaCore revenue decreased 8% to $24.7 million. Tonnage sold was flat at 1.5 million tons; management cited lower brokered stone revenue and seasonal and weather effects.
- Oil and gas revenue rose to $27.6 million from $15.2 million, primarily due to the asset-sale gain. Excluding that gain, production and royalty revenue declined amid lower prices, lower production, and asset sales. Williston oil production fell 20%, and average oil price fell 35% year over year.
- NRP completed a 1-for-10 reverse unit split effective February 18, 2016; reported unit and per-unit figures have been retroactively adjusted.
Outlook, risks, and unusual items
- Going-concern risk at NRP Oil and Gas: Management stated there is substantial doubt about that subsidiary’s ability to continue as a going concern through March 31, 2017. Its $75.0 million reserve-based facility has a declining borrowing base: scheduled reductions to $70 million on August 1, 2016 and $50 million on October 1, 2016 require repayment of any excess. NRP began a process to sell the subsidiary’s non-operated Williston Basin working-interest properties within 12 months. The subsidiary is designated unrestricted under the senior-note indenture, so a default there would not itself cross-default the NRP or Opco debt agreements.
- Consolidated liquidity and refinancing: Management forecast Opco covenant compliance through March 31, 2017, but said forecasts are sensitive to commodity prices and counterparty risk. NRP said it did not believe it could access debt or equity capital markets under prevailing conditions, and may need asset sales or nontraditional financing on unfavorable terms. It is pursuing asset dispositions, expense and capital-spending controls, working-capital management, and potential lender waivers or amendments.
- Commodity and counterparty exposure: Management described coal markets as severely challenged and oil and gas prices as depressed; it expected continued market pressure and natural production declines. NRP had not hedged future oil or natural gas production. Foresight Energy’s Deer Run mine remained idled; NRP disputed its force-majeure claim. Nonpayment of minimum deficiency payments for 2015 and Q1 2016 had a $23.6 million cash impact, which could increase while the mine remains idle.
- Other disputes and contingencies: NRP sued a Foresight subsidiary over alleged improper recoupment of minimum royalties; the reported cash impact was $4.7 million, and a valuation allowance was recorded. A subsidiary was also named in a West Virginia mine-discharge lawsuit; NRP said the potential loss could not yet be reasonably estimated. Management did not expect ordinary-course legal proceedings overall to materially affect financial position, liquidity, or operations.
- Subsequent events: In April 2016, lease terminations and modifications resulted in approximately $35 million of deferred revenue recognized, including $26.2 million from forfeited minimum-royalty recoupment rights and approximately $9 million from lease modifications. The board declared a $0.45-per-unit distribution payable May 13, 2016.
- NRP paid a $0.45-per-unit distribution in February 2016, compared with $3.50 per unit in February 2015, reflecting the previously announced substantial distribution reduction. The filing provides no quantitative full-year earnings or revenue guidance.
Important facts for investors to verify
- Progress, terms, and proceeds of the planned NRP Oil and Gas asset sale, and whether proceeds meet the facility’s mandatory repayment requirements.
- NRP Oil and Gas borrowing-base reductions, covenant compliance, and the subsidiary’s ability to meet required principal payments.
- Opco covenant headroom as leverage limits tighten, and the plan for the October 2017 revolver and October 2018 senior-note maturities.
- Whether coal production and royalty receipts stabilize, including the outcome of the Deer Run force-majeure litigation and recovery of disputed payments.
- Recurring operating cash generation separate from asset-sale proceeds, and the sustainability of distributions amid debt-service needs.