Fording Canadian Coal Trust (fdg)

[SeriousMoney]

Penn Virginia: ATM of the Coal World
Motley Fool, By Stephen D. Simpson, CFA, Thursday November 3, 1:10 pm ET

One of these days, I'll learn to take my own advice and get in on ideas like Penn Virginia Resource Partners (NYSE: PVR - News).

I've talked for the better part of a year about how this well-run coal and mid-stream natural gas partnership continues to generate solid cash flow through prudent management of now-hot resources. In my own defense, though, I would point out that investor enthusiasm for energy plays has compressed the yield for stocks like this and has made them a little less attractive relative to past valuations.

Third-quarter performance reflected the ongoing strength in PVR's underlying business. Operating income more than doubled, and the company reported that distributable cash flow climbed 72% from last year's level. Although this metric was up sequentially by 6%, management has elected to maintain a steady dividend for now.

As the headline numbers would suggest, underlying performance in coal and gas was quite good. Operating income from coal rose 58% as Penn Virginia saw the average royalty per ton increase about 18% and the amount of coal produced rise about 6%. Those results were pretty much squarely in line with management's guidance in the second-quarter report.

In the gas business, the company booked revenue of almost $104 million as inlet volumes averaged about 126 million cubic feet per day. Gross processing margin improved almost 12% on a sequential basis, moving from $1.10 per mcf to $1.23 per mcf. As this business was acquired within the past 12 months, there are no internal year-over-year comparisons.

Management's guidance for the next quarter probably merits a little explanation. Specifically, Penn Virginia is looking for lower coal production in the next quarter. What gives? Well, PVR gets paid for coal mined from its property, but coal seams don't really respect geography -- they stretch for miles, and one seam can have several owners. So when a customer's long-wall mining equipment moves off the company's property, production drops (and vice versa).

I would strongly suggest that investors not get wrapped up in quarter-to-quarter production concerns, but rather look at what this company has done over the past few years. Furthermore, I'd expect management to continue to evaluate new potential business that could further boost distributable cash flow in the future.

There are many ways to play coal, ranging from regular companies like Peabody (NYSE: BTU - News) to trusts like Fording (NYSE: FDG - News), even to equipment makers like Joy Global (Nasdaq: JOYG - News). And then there are plenty of other income-oriented asset plays out there like San Juan Basin (NYSE: SJT - News) and PrimeWest (NYSE: PWI - News). Nevertheless, for all of the choices available, I'd still suggest that income-oriented investors at least take a gander at Penn Virginia.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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