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