November 8, 2019 - Natural Resource Partners expects a rough road ahead on challenging metallurgical and thermal coal market conditions and after bankruptcies from four of its lessees this year, with a fifth expected to follow soon.

"Falling coal prices, in particular prices for metallurgical coal, are putting increasing pressure on our lessees," Craig Nunez, president, said during the company's third-quarter 2019 earnings call Wednesday, noting the four bankruptcies and Foresight's recent forbearance agreement with its lenders this year.

While met coal demand has weakened amid a decline in global economic growth, low natural gas prices and growing utility stockpiles have challenged the domestic thermal market.

The thermal export market, as well, has weakened because of lower demand from European utilities, competition from international producers and an oversupply of LNG.

Not only was NRP affected by weak prices and demand this year, but "the risk of a Foresight bankruptcy and its potential impact on EBITDA looms," Seaport Global senior analyst Mark Levin and senior associate analyst Nathan Martin said, adding that Foresight accounts for about 25% of NRP's coal revenues.

'Temporary Idling'

Regarding the recent bankruptcies of NRP's lessees Blackjewel, Blackhawk, Cambrian and Murray Energy, Nunez said, "if the underlying operation is actually profitable, if it's economically viable over the long term, then it will emerge from bankruptcy and continue operating."

"There may be some temporary idling during the bankruptcy process," he said. "There may be a delay in cash receipts and cash from that asset for us while the bankruptcy proceedings are taking place. But in the end, if an operator can make money with that property for the long term, that property invariably emerges from the bankruptcy process operating and we tend to not have any material change in our cash flows on our contract structure to the negative."

"On the other hand, if the asset to which you've leased to an operator is not profitable, if it's marginal, if it's losing money, if it has excessive liabilities for the operator associated with it that make it a bad economic proposition for that operator or for another operator, the chances are that the contract structure we have won't protect us," Nunez added.

Seaport Global's Levin and Martin said NRP had "weaker than expected Q3 results and a pretty glum but realistic assessment of the coal market backdrop."

In addition, "thermal coal fundamentals and pricing have also been very weak," Levin and Martin wrote. "With natural gas prices averaging $2.38/MMBtu the last six months, utility demand for thermal coal has shrunk significantly so far in 2019. Electric coal consumption [fell 13% year on year in the first eight months of 2019], while coal's share of the electric generation pie fell to 23% in the same month. These are among the lowest monthly levels since the EIA began accumulating data. Unless natural gas prices and /or API2 prices catch a major bid, we suspect NRP's lessees' thermal coal production will also be under pressure."

Appalachian Sales Volumes Fall

Total Appalachian sales volumes were about 4 million st, down 13.5% year on year.

Tons from Central Appalachia totaled 3.2 million st, down 16.8% from Q3 2018, while Northern Appalachian sales were 290,000 st, down 16.9%, and Southern Appalachian sales were 438,000 st, up 26.6%.

The royalty revenue per ton was $2.54/st for NAPP coal, compared with $4.01/st in the year-ago quarter, $5.25/st for CAPP, down from $5.37/st, and $5.99/st for SAPP, compared with $6.82/st.

Total third-quarter NAPP revenue was $735,000, down 47.6% year on year, while CAPP revenue was about $17 million, down 18.6%, and SAPP revenue was $2.6 million, up 11.3%.

Illinois Basin sales volumes totaled 551,000 st, down 9.5% year on year, and northern Powder River Basin sales were 532,00 st, down 37.8%.

Revenue per ton for IB coal was $4.82/st, compared with $4.89/st in Q3 2018, and for northern PRB coal it was $4.69/st, up from $3.79/st.

Total Q3 revenue for IB coal was about $2.7 million, down 10.6%, and northern PRB revenue was $2.5 million, down 23%.

NRP's coal royalty segment had net income of about $40.3 million, up 6.7% from the year-ago quarter.

Coal Revenue Outlook

During Q3, met coal made up about 60% of coal royalty revenue and about 55% of coal royalty sales volumes.

"Falling coal prices have not yet had a significant direct impact on our results, but we believe that's about to change as contracts entered into last year by our lessees expire and are replaced with new contracts and what we believe will be lower prices," Nunez said.

Nunez said that he expected "significantly" lower coal revenue in the months ahead, given the bearish market.

"Despite this negative sentiment, we are confident, however, that the progress made in recent years to reduce debt, build liquidity and streamline costs positions us well to ride out the storm," he added.