5 MLPs Deriving Rich Yields From Coal

Includes: ARLP, NRP, PVR, RNO, WLB
by: Clay King

Approximately 50% of electrical production in the United States is produced from the energy released from burning coal. In addition, the United States has about 25% of the world's coal reserves. In order to burn the coal to produce electricity, it must be mined and delivered to the electric utilities. Many of those companies are MLPs (Master Limited Partnerships) that pass along great income payments to their investors.

This article will examine five coal MLPs to consider for the readers investment possibilities. The yields and distributions range from as low as 4.8% to a high of nearly 8%.

Alliance Resource Partners, L.P. (NASDAQ:ARLP): The company is located in the three major U.S. Coal mining regions in the Illinois Basin, Central Appalachia, and Northern Appalachia. They have nine mining fields and have approximately 700 MM tons of coal reserves. Alliance is generally considered to be the best play on the Illinois Basin by most analysts. Demand for their high sulfur coal should increase as new and better scrubbers are installed at electric utilities Distributions to shareholders have grown from $2.53 in 2008 to an estimated payment this year of $3.62. Current yield is 4.8%.

Oxford Resource Partners, L.P. (OXF): Oxford is a low cost, coal producing MLP with reserves in Northern Appalachia and the Illinois Basin. Oxford sells to large utilities under long term contracts. The predecessor to Oxford Resource Partners, Oxford Mining Company, was formed in 1985. In 1989 the company transitioned to an independent coal producer, and in August 2007 the partnership was formed. Oxford went public with the completion of its initial public offering for 8,750,000 common units representing limited partner interests in July 2010. The initial full quarterly distributions for Oxford is $0.4375 per share which results in a current yield of 7.61%.

Penn Virginia Resource, L.P. (NYSE:PVR): Penn is based in Radnor, Pennsylvania with more than 800 million tons of coal in West Virginia, New Mexico, Virginia, and Kentucky. Penn also has some natural gas assets. Quarterly distributions have climbed from $0.26 a quarter to the most recent payment of $0.48. Current yield is 7.34%.

Rhino Resource Partners L.P. (NYSE:RNO): An MLP with coal mining operations in the Illinois basin and Central and Northern Appalachia. Proven reserves stood at 325 million tons. The shares were brought public in September of 2010. Initial distributions were 42 cents per share and recently raised to 46 cents. Current yield is 7.9%.

Natural Resource Partners L.P. (NYSE:NRP): NRP sub-leases its land and mineral rights on a royalty producing basis. It does not mine but instead reaps its profits from the work of its leasors from its estimated reserve of 2.1 billion tons of coal reserve. Distributions are $0.54 per quarter since the second quarter of 2009, current yield is 6.73%.

Of the companies discussed, Alliance (ARLP) has the longest track record dating back to 1999 with increases each year since 2003. Natural Resource Partners has paid distributions since 2003. Penn Virginia Resource Partners has distributed payments since 2001, Oxford's first payment was in 2010 and Rhino Resources began payments with its initial distribution in 2010.

Estimated growth distributions for each company for 2012:

Company Estimated Distribution Growth for 2012 Current Yield
Alliance Resource Partners, L.P 15% 4.8%
Oxford Resource Partners, L.P. 11% 7.6%
Penn Virginia Resource, L.P. 1-2% 7.34%
Rhino Resource Partners L.P. 7-8% 7.9%
Natural Resource Partners L.P. 0-2% 6.73%

Clearly, for those investors who insist on five years of increasing dividends, several of these stocks do not make the cut. Natural Resource Partners has a good record from 2003 to 2009 but has stalled with a stagnant dividend since 2009. Oxford, an IPO in 2010, yields a nice 7.6% but has a limited history. Expectations for Oxford however seem excellent. Rhino, much like Oxford, has a limited history with its recent IPO as well, but yields 7.9%. Penn Virginia has paid a distribution for the past 10 years but the distribution was not increased in 2009 or 2010, though it recently increased it by 2%. Alliance Resource Partners is the clear winner among these five securities with a record of increasing distributions since 2003. However, Alliance yields the least at 4.8% but has the highest projected distribution growth rate.

For the best record and fastest growth potential Alliance stands at the top of the group. Oxford, though it has a short public record, has a good yield of 7.6% with projected growth of 11%. If committing to a coal MLP, purchasing either seems appropriate as these stocks have corrected over the last three months offering a possible buying opportunity.

Disclosure: I am long OXF.