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Penn Virginia (PVR): Royalty Trust & MLP Hybrid

 February 21, 2012 06:00 PM

by Nathan Slaughter, editor Energy & Income

Ever wonder what might happen if a master limited partnership married a royalty trust? Well, it just might look something like Penn Virginia Resources (PVR).

Penn Virginia is a growing midstream energy player with 4,200 miles of natural gas-gathering pipelines, dozens of compressor stations and seven large-scale processing facilities. These assets are in important producing regions from the Gulf Coast to the Rocky Mountains.

More than half of the volume flowing through these pipelines and processing plants is governed by fee-based contracts and thus insulated from commodity price movements or narrowing profit spreads. The rest is mostly hedged to minimize volatility and ensure stable cash flows.

That means that the more natural gas coursing through the firm's veins each day, the more cash it generates -- and throughput volumes have more than doubled since 2006 to surpass 500 million cubic feet per day.

But this is only part of the story. Penn Virginia is an unusual royalty trust/MLP hybrid (60/40 in terms of EBITDA).

So pipelines account for just under half of the firm's income. The bigger portion comes from royalty payments -- not from the sale of oil or gas or precious metals, but coal.

The company is sitting on 900 million tons of coal reserves. Three-fourths of that is premium low-sulfur coal found in the Appalachian Mountains of Virginia, West Virginia and Kentucky.

Suffice it to say that PVR will be feeding power plants on the East Coast and export markets for many years to come.

Instead of mining the coal itself, PVR leases its land out to other producers. This brilliant strategy eliminates mine operating costs and other headaches.

And coal isn't the only resource extracted from its rich land. PVR is also reaping royalty rewards from 6.3 billion cubic feet of oil and gas reserves. And the timber from 243,000 acres of forest is selectively harvested and sold to make furniture.

All in all, PVR generated distributable cash flow (DCF) of $107 million through the first nine months of 2011, versus $99 million during the same time frame in 2010. And with no general partner taking a cut, nearly all of that wealth is being dished out to unitholders.

After leveling out for a few years following the recession of 2008, distributions are on the rise once again.

In fact, there have been four consecutive dividend hikes. The latest increase announced just a few weeks ago lifts the annual payment to $2.04 per unit, for a hefty yield of 8.0%.

PVR has dished out $15.42 per unit in cumulative distributions since January 2002. I think we'll see much more than that over the next decade.

To capture this growing income stream, I am buying  Penn Virginia Resource Partners in my "Dependable Income" Portfolio.


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