Plum Creek Earnings: Seeing the Forest Through the Trees

 |  Includes: CUT, PCH, PCL, RYN, WY
by: Rubicon Associates

A couple of interesting points can be gleaned from Plum Creek's (NYSE:PCL) earnings release and call transcript:

The company continued to defer its sawlog harvest in response to weak prices. The quarter’s sawlog harvest was 211,000 tons, or 26 percent, lower than the same period of 2008. Pulpwood prices were stable during the fourth quarter and were 13 percent lower than the same period of 2008. Pulpwood harvest volumes were 82,000 tons, or 13 percent, lower than the same period of 2008.

The company plans to harvest between 15 and 16 million tons of timber this year, comparable to 2009 levels. The company expects its Northern harvest volume to be similar to 2009’s level, continuing to defer a significant portion of its sawlog harvest for future years. In the South, the company expects its overall harvest to be similar to 2009’s 11.4 million tons, but will shift its harvest emphasis from first thinnings that produce exclusively pulpwood to second thinnings that produce a mix of pulpwood and small-diameter sawlogs. As a result, the company expects its Southern pulpwood volumes to decline as much as a million tons from 2009 levels with a corresponding increase in small-diameter sawlog volumes.

We are seeing the same types of statements across the industry: sawlog harvests are being reduced until pricing recovers (some early signs of it in NW hardwoods) while pulpwood harvests and small diameter sawlog harvests are growing (pardon the pun). Ultimately, value accretes while trees grow waiting for housing/construction to return.

A lot of this lumber is filling inventories; it is concern over wet weather. As we mentioned, lot of these mills especially in the southern United States are very short inventory, and therefore there is not a lot of lumber inventory in the system.

I was down in Mississippi, Louisiana, and Arkansas last week, and what my guess is that half the forests are inoperable, and I don’t what it was like two months ago. I know they got some 9 inches of rain in one day. It’s a severe problem, and most areas you can’t operate in today. They need two or three or four weeks of dry weather so that we can get into a lot of these areas. That’s why inventories are so tight in that region. So it’s a huge issue.

Southern timber prices are firming/increasing due to a supply demand imbalance that could correct itself (should the rain stop falling). Perhaps this will help Q1, but prices could recede in time for Q2.

We don’t see a lot on the market. I think what wee see on the market is generally 15,000, 20,000, 30,000-acre parcels by all kinds of land owners. We do hear from TIMO and others that there continues to be a strong institutional interest in the asset by both US and European investors, but it’s hard to say what the interest is because there is really not much on the market. The Anthony Forest Products transaction got completed recently by TIMO for a very attractive price. I think it was certainly over $200 million—a size that we were quite frankly surprised at. So we hear there continues to be investor interest.

Echoing a post from the other day, TIMOs are involved, but there are not many large transactions taking place as there are a lot of mom and pop and smaller sellers out there.

Plum Creek began delivering biomass under the program in early January. At this early stage, we expect the benefit to the company will be fairly modest in the $8 to $12 million range in 2010 depending on the final rules.

Again, echoing what we have heard across the board. Biomass will be accretive as instead of leaving it on the floor, branches, tops etc can be chipped/pelletized and sold. The company went on to say that they are still waiting for more guidance on the BCAP program in order to gauge the longer-term value to the company.

Their outlook for 2010:

We’ve seen improving tone in our conversations with customers across the nation. Lumber prices have been on a positive trajectory—another positive sign for log demand and pricing. While we believe recovery in our core businesses will continue in 2010, we believe the recovery will be slow by historic standards.

In aggregate, we expect higher saw log prices, slightly lower pulpwood prices.

Bottom line is we are getting more insight into the 2010 timber markets. Thus far they do not seem strong, but they appear to be improving. This is obviously good news for timber investors and timber REIT (or ETF) investors.

Disclosure: no positions