We reiterate our Neutral recommendation on Penn Virginia Resource Partners, L.P. (PVR). The partnership’s first quarter results lagged the Zacks Consensus Estimate and the year-ago quarter earnings. This was due to lower coal royalty volumes, a fall in natural gas prices and a decrease in coal and natural gas resource management activities.
Penn Virginia generates a substantial amount of its revenue from a limited group of customers. In the future, this might pose a risk of customer concentration for the partnership, which in turn would increase exposure to credit risks on accounts receivable. Eventually, a financial collapse of any of these customers may impact Penn Virginia’s ongoing financial performance.
We view Penn Virginia as a well positioned organization with a strong financial position. Recently, the partnership raised its cash distribution to 52 cents per unit or $2.08 on an annualized basis, representing a 2.0% sequential increase and an 8.3% increase year over year. We expect the partnership’s practice of raising cash distribution at regular intervals to be beneficial for the stock as it attracts investor attention.
Penn Virginia’s Midstream business is an important growth avenue for the partnership. This business provides a diversification to its low-risk coal royalty business. The growth of this segment is mainly linked to frac-spread, the price differential between natural gas liquids (“NGL”) sold and natural gas purchased on a per million metric British thermal units (“MMBtu”) basis. The partnership has already entered into hedging to cover approximately 94% of its commodity-sensitive volumes in 2012.
On the flip side, federal and state regulators are implementing new rules to minimize greenhouse gases emissions. The shift of electric power generators to other sources of fuel, substituting the use of coal with natural gas or renewable energy, could affect the ability of Penn Virginia’s lessees to sell the coal it generates and thereby reduce its coal royalty revenues.
The partnership’s natural gas midstream operations face several kinds of risks during gathering, compression, treatment, processing and transportation of natural gas and NGLs. These include pipeline damage due to natural disasters, leakage of natural gas, unintentional damage from construction and farm equipments, and fires and explosions during operations.
During the earnings announcement, Penn Virginia posted its 2012 guidance, which forecasts EBITDA in the range of $260–$280 million and full year 2012 distributable cash flow, net of maintenance and replacement capital, within the band of $160–$180 million. As per the Zacks Consensus Estimates, Occidental’s second quarter and full year 2012 earnings are pegged at 21 cents and 95 cents per share, respectively.
Penn Virginia Resource Partners, L.P. currently retains a Zacks #3 Rank (short-term Hold rating). The partnership competes with CONSOL Energy Inc. (CNX).
Based in Radnor, Pennsylvania, Penn Virginia Resource Partners, L.P. is involved in the management of coal and natural resource properties and gathering and processing of natural gas in the United States.
CONSOL ENERGY (CNX): Free Stock Analysis Report
PENN VA RESRC (PVR): Free Stock Analysis Report
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