An Income Twofer in Energy
Wednesday February 15, 1:23 pm ET
By Stephen D. Simpson, CFA (TMFWildWeasel)
Some companies do nothing more than produce coal and/or lease the rights to mine coal on their property, and then pass along the cash to investors. There are also plenty of companies that handle natural gas distribution (called midstream operations) and pass along robust dividend checks to shareholders. And then you have Penn Virginia Resource Partners (NYSE: PVR - News). Like the combination of chocolate and peanut butter, this fusion of coal assets and midstream natural-gas-handling facilities could continue to be pretty tasty for investors.
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Fourth-quarter results were more of the same, and I mean that as a compliment. Operating income jumped 76%, and net income rose 53%. But the number that really matters to the owners here is the distributable cash flow, which increased 67% from last year. That, in turn, allowed the company to boost its dividend about 8% on a sequential basis.
In the coal business, operating income rose 50%, as production increased nearly 6% and the average royalty per ton rose 19%. For those of you who are new here, Penn Virginia doesn't actually mine the coal itself, so production levels aren't under its control, strictly speaking. Year-over-year comparisons aren't possible for the midstream business (it was purchased in the middle of last year), but volumes increased sequentially while gross processing margins fell.
I like this business quite a lot, but I'll admit that it's a bit tricky to come up with appropriate valuation targets. After all, how do you accurately forecast future acquisitions, production levels, royalty rates, and gas throughput?
Part of what I do instead is look at some of the other natural resource plays that I know and like -- companies such as Motley Fool Income Investor pick Enterprise Products (NYSE: EPD - News), Plum Creek Timber (NYSE: PCL - News), Fording (NYSE: FDG - News), Kinder Morgan (NYSE: KMI - News), and Plains All American (NYSE: PAA - News). These are all very different companies, and it's not really fair to compare ratios like price-to-book, EV/EBITDA, or even dividend yields across the board. Still, it does give me a rough idea of relative valuations and performance.
