We recently moved to a Neutral recommendation for Penn Virginia Resource Partners L.P. (PVR) as we see improved synergies following the partnership’s merger with its general partner, Penn Virginia Holdings L.P. (PVG).
Based in Radnor, Pennsylvania, Penn Virginia Resource Partners operates in the United States and engages in managing coal and natural resource properties. The partnership is also involved in gathering and processing of natural gas. It conducts operations in two business segments: Coal and Natural Resource Management and Natural Gas Midstream.
Fundamentally, Penn Virginia’s gas midstream operations are cash cows, while it uses its coal assets effectively to generate ample cash as well.
Penn Virginia’s coal business generates revenues by leasing its coal reserves under long-term contracts to operators for a royalty payment. Penn Virginia’s royalty structure allows for asset and producer diversification, while it eliminates the direct exposure risks that coal mining companies typically face, namely mine operating costs and risks, environmental liabilities and labor relations challenges.
Additionally, the long-term nature of the partnership’s lease agreements with operators, who in turn have long-term price contracts with utilities, helps it to overcome price volatility and generate reasonably stable cash flows.
Penn Virginia’s Midstream – gas gathering and processing – business, another growth avenue for PVR, provides a diversification to its low-risk coal royalty business. The partnership earns revenue from this segment by efficiently hedging its NGL sales and natural gas purchases as profits from this segment is mainly linked to frac-spread, the price differential between natural gas liquids (NGLs) and natural gas on a per MMBtu basis.
Currently, it has roughly 55% and 32% of its volumes hedged for 2011 and 2012, respectively. The partnership generally targets hedging 50% to 60% of its commodity-sensitive volumes over a two-year period.
Apart from this, Penn Virginia Resource Partners recently received the consent of its unitholders with the majority of PVR unitholders voting in favor of its proposed merger with Penn Virginia Holdings. The approval of PVG unitholders is still awaited.
With the PVR-PVG merger nearing conclusion, we emphasize the projected benefits from the merger, which include lower cost of capital and an improved competitive position for the partnership. Though the transaction will initially dilute the partnership’s distributions per unit, we continue to see distribution increases in the long term due to the cancellation of the incentive distribution rights.
Based on this robust long-term picture, we have now moved to a Neutral rating, from Underperform, for the stock.
PENN VA GP HLDG (PVG): Free Stock Analysis Report
PENN VA RESRC (PVR): Free Stock Analysis Report
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