Q2 2023 Natural Resource Partners L.P Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the natural resource Partners L. P. Second quarter 2023 earnings call I would now like to turn the call over to Tiffany Sammis manager of Investor Relations. Please go ahead.
Thank you good morning, and welcome to the natural resource partners second quarter 2023 Conference call today's call is being webcast and a replay will be available on our website joining.
Joining me today are Craig Nunez, President and Chief Operating Officer, Chris is Ola Chief Financial Officer, and Kevin Craig Executive Vice President.
Our comments today may include forward looking statements, reflecting <unk> views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward looking statements.
These risks are discussed in <unk> Form 10-K, and other securities and Exchange Commission filings.
We undertake no obligation to revise or update publicly any forward looking statements for any reason.
Our comments today also include non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP measures are included in our second quarter press release, which can be found on our website.
I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee or detailed market fundamentals.
Now I would like to turn the call over to Craig Nunez, Our president and Chief operating Officer.
Thank you Tiffany and good morning, everyone.
In RFP generated $82 million of free cash flow in the second quarter and $308 million of free cash flow over the last year.
Strong financial performance enabled us to make further progress toward our goal of retiring our long term debt and preferred equity, which we believe will in turn maximize future free cash flow available for common unit holders.
During the second quarter, we permanently retired $81 million of our 12% preferred equity increasing our total preferred equity retirement for the year to $128 million and lowering our outstanding balance of preferred equity to 100.
$22 million.
Following this redemption, our total obligations, which includes debt preferred equity and warrants decreased over 10% since last earnings call down to about $385 million as of today.
Moving to our mineral rights business.
While metallurgical coal prices declined during the second quarter and were well off the record levels seen in 2022.
Our mineral rights segment generated a solid $56 million of free cash flow during the quarter.
We continue to believe that the supply demand balance for met coal will remain well supported for the <unk>.
Foreseeable future, primarily due to long term demand trends and the lack of investment in new met supply.
Thermal coal prices also weakened in the second quarter due to relatively mild winter weather and inventories at many coal fired power stations increased significantly as a result.
While we believe north American thermal coal will face near term headwinds and continue its long term secular decline.
We also believe underinvestment in new sources of thermal coal production will likely provide price support at levels that are relatively strong when compared to historical norms.
We continue to see significant index price movement across the coal markets quarter over quarter and year over year.
But I believe the strides taken to Delever and Derisk, our business over the years position us well to generate robust free cash flow despite market volatility.
Yes.
Our soda ash investment in <unk>. This is Jim Wyoming continues to be an important source of free cash flow generation is in RP received $32 million in distributions. This quarter from CIS is your MYOB due to strong realized sales prices and early payment of the second quarter distribution normally receive.
<unk> in the third quarter.
Softening soda ash demand, coupled with new capacity from China has recently caused a significant drop in spot prices, which is likely to weigh on results versus the jam Wyoming in the second half of the year.
Despite these near term pricing pressures, we believe the long term fundamentals of the soda ash industry remain favorable.
In Wyoming is well positioned with its low cost of production and strong balance sheet.
Turning to our carbon neutral initiatives, we remain focused on exploring opportunities to expand our carbon neutral portfolio with the goal of monetizing our assets through lease transactions for permanent underground.
So sequestration for sequestration and the generation of electricity using geothermal wind and solar energy.
Additionally, we continue to evaluate other potential opportunities in the carbon neutral space, which may include soil and grassland sequestration lithium production and methane destruction credits.
We believe our potential long term future cash flows related to carbon neutral initiatives could be significant all while requiring no capital investment by an RP.
And with that I'll turn the call over to Chris to cover our financial results.
Thank you Craig and good morning, everyone.
During the second quarter, we generated $81 million of operating cash flow and 70 million of net income.
Our mineral rights segment generated operating cash flow of $55 million free cash flow of $56 million and net income of $53 million in the second quarter of 2023.
When compared to the prior year quarter segment, net income and free cash flow decreased $17 million and $15 million respectively.
Primarily due to lower metallurgical sales prices.
Although metallurgical pricing has declined over the past year.
It remains relatively strong.
Compared to historic historic norms, and we believe the many challenges operators face to increase production and sales that include transportation and logistics labor and limited access to capital should provide ongoing price support.
In regard to our met thermal coal royalty revenue mix metallurgical coal made up 70% of our coal royalty revenues and 55% of our coal royalty sales volumes for the second quarter of 2023.
Moving to our soda Ash business segment net income in the second quarter of 2023 was $27 million as compared to $15 million in the prior year period.
This $12 million increase was primarily driven by strong soda ash demand and higher sales prices.
Free cash flow from our soda Ash business segment in the second quarter of 2023 increased $22 million as compared to the prior year period.
This increase was due to two main factors the.
The timing of distributions received from Suzanne Wyoming, and the improved operating performance driven by higher sales prices.
Regarding the timing during the second quarter. This year, we received an $11 million quarterly distribution related to the first quarter performance and a $21 million.
Distribution we're.
Related to the second quarters performance.
In the past.
We receive quarterly distributions from systems, Jim Wyoming, approximately two months following the end of each quarter.
Shifting to our corporate and financing segment costs for the second quarter of 2023 were $9 million compared to $17 million in the prior year period.
This 8 million caused the decrease was primarily due to lower interest expense in 2023 from a continued deleveraging and having less debt outstanding.
In addition to this cost decrease our corporate and financing segment free cash flow in the second quarter of 2023 improved $12 million as compared to the prior year period as a result of less cash paid for interest.
In addition to debt repayment, we continue to make progress on the redemption of our preferred equity as Craig mentioned in the second quarter, we were able to permanently retire an additional $81 million of our preferred units at par with cash, bringing our total preferred unit redemptions to $128 million and lowering the outstanding amount of preferred units.
$122 million.
We will save over $15 million annually and preferred unit distributions with.
With these redemptions.
Finally regarding our quarterly distributions and May of this year, we paid a first quarter distribution of <unk> 75 per common unit and $6 1 million cash distribution to our preferred unitholders.
This morning, we announced second quarter distribution of <unk> 75 per common unit and $3 65 million cash distribution to our preferred unit holders.
With that I'll turn the call back over to our operator for questions.
Okay.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again.
Well now take a moment to compile a roster.
We did receive a question from the line of Charles Fischer from Raffles.
Please go ahead.
Yes, yes, I saw there was a decrease in production.
Illinois Basin, just could you give a little color on that.
Okay.
Sure we'd be happy to.
Okay.
And what happened there in the Illinois Basin was there is a.
There was a temporary as they are.
Part of the mine plan there was a they were temporarily off of our coal and part of their mine plan as they go on and back off of our coal and just during that period they were temporarily off of Oracle.
For that period, which in its not not uncommon.
Great. Thank you.
Our next question comes from the line of Nat Stewart. Please go ahead.
Yes, thanks for taking my question.
Just had.
I'm curious about the I know ive seen this before and I actually think I've asked about it but could you kind of explain the.
I believe it's a noncash charge related to the.
Pay down of the preferred Securities I was just wondering if you could give us a little bit of explanation for that.
Sure This is Chris.
Yes, yes, absolutely.
And.
What's happening there is it's that's a difference between the par value that we're paying for the preferred units and the book value that we have them. When we recorded them back in 2017, when we were when we entered into the preferred units. They were also warrants associated with those preferred units and so the $250 million we received back in.
2017 on our balance sheet that that $250 million is allocated to both the preferred units and the warrants.
And so when we when we redeem our preferred units.
Mount of cash, we pay us more than the book value.
That is that is being taken off and that was allocated to those preferred units. So there is no impact to the income statement. Its on the balance sheet and there is an impact to the earnings per unit Thats, that's calculated and allocated to the common unit holders.
Okay, great that makes sense.
So what are the priorities. Obviously this has just been a tremendous.
Paydown of dilutive securities over the past couple of years.
And it looks like it's going to leave a tremendous amount of ability to pay distributions and not all that long from now on what are the priorities for paring that down is there anything changing I think you surprised me a little bit with the magnitude of the pay down of preferred securities. This year I think it went above 33%.
So how is that whats the thinking there for the next six months or maybe even beyond that.
This is Craig.
Good question.
Intend to continue to pay down our preferred and dead as rapidly as we can.
To the extent we can.
Zero on our credit revolver.
At a lower cost than the 12%.
On the preferreds and to the extent that we can have the preferred holders waive the make whole premium which is called them more ATM Oh I see so that we're able to buy those bonds back at par.
We can replace 12% obligations with something more like seven or 8% obligations, we're going to do that as much as we can.
And then immediately began paying down the revolver with cash that we generate as well and our goal is to pay down the preferreds.
The bank revolver, and and then of course continue paying down our private placement notes, which are on an amortization schedule and also.
By the time, they say they settle.
In our first quarter of 2025 settle our warrants that are outstanding we're going to want to get rid of all of those obligations as soon as we possibly can.
Great, Yes, I think Thats what has.
Kind of a remarkable about this is how.
Rapidly that's been able to occur do you know what.
<unk> is now.
Okay.
I do.
It's in it's roughly.
Chris I think it's around 10% or so is it right now.
That's correct and percent something that's correct Greg.
It's enough.
Just enough right now, but that you don't want to it's not as attractive.
Attractive to borrow on our credit facility to pay pay them back now.
Implied return that you receive on paying a premium over par is just not attractive yet but.
That Mike goes down each time, we make a preferred distribution.
And so by the time, we get to first quarter of next year second quarter of next year it'll.
It will be such that the <unk> is not only.
More so when you buy it when you buy off the preferred you get to 12%.
Implied return essentially guaranteed return even if the.
Preferred holders do not waive the more equal there's no need for them too because it doesn't exist anymore.
Yeah.
Great, Okay, well, I think and I think many of the.
Unit holders are very happy with the strategy you guys have done and we see it is creating a tremendous amount of value for the unit holders. So.
Please keep it up and.
Thanks for doing a great job.
Those are kind words really appreciate it I think that there needs to be.
Equal Thanks, I'll go back to our unitholders, we don't have a lot of turnover and so most of most of our unitholders have been with US a long time and and you. All know that this has been a very long term strategy. This has been going on since 2015.
Where are we.
We turned over a turn to a new page in our book and we have been steadfast resolute and this strategy. We do believe that given the commodity exposures that we have in our business given the fact that we are non operators and the assets. We have so we have limited levers that we can pull.
To enhance performance et cetera, and given the pressures that space capital sourcing for fossil.
Fossil fuels in general, but in particular companies that have large exposures to thermal and met coal.
We think this is the most prudent approach, we derisk delever the balance sheet.
And then we have commodity price exposure and we have volume exposure.
And we think that in that situation.
We're going to receive the best valuation in the market. We also think we will have them.
Most stability of free cash flow that we possibly can and all the free cash flow will essentially be attributable to common unitholders.
And available for <unk>.
For common unitholder purposes. So thanks, thanks for the kind words, but also thank you to all on this call, but had been with us and patient with US all these years.
Okay.
Great. Thanks.
Thanks.
Okay.
We do have another question from the line of <unk>. Please go ahead.
Your line is open. Please go ahead.
Yeah.
Can you hear me.
Hello can you hear me yes.
Hi, This is actually Andrew Shirley.
Thanks for taking my question, if you pay down your entire preferred and have less than one times leverage.
Is there any reason why you can't reinstate a more full payout ratio in the first half of 2024 prior to taking that down to zero.
Okay.
There is no legal reason there is no contractual reason that we could not do that but that is not our strategy our strategy is.
Is to eliminate all of these these obligations we have the preferred the debt and settle our warrants.
Before such time as we began to raise the distributions.
Or look at consider raising the distributions and the reason for that is that we have learned firsthand.
That yeah.
It would be imprudent for a company such as ours without our business profile to rely at all.
Sourcing capital from banks or from capital.
Markets to fund our business in the future.
So when you you can no longer rely on rolling forward or refinancing.
Your credit obligations you have to assume that you operate with.
No permanent debt in your capital structure, So we want to clean everything up.
Say on the same path, we've been on now for quite a while and once we have the capital structure fully clean then we will evaluate.
Our capital deployment strategies is that going to be too long in the Grand scheme of things, we see light at the end of the tunnel, but early 2024 is too soon because remember even when we take out those preferreds were simply switching the the obligation from preferred.
Units to that.
So that's our philosophy.
And when we when we look at it we think in the long run on a risk adjusted basis. This is going to maximize value for our common unitholders.
Okay fair enough.
I guess I assume that over the next couple of quarters. The preferred the remaining balance of the preferred could get taken out by free cash flow, even after the dividend distribution, you're already paying but I don't mean to split hairs on that so that there wouldn't be any incremental debt.
But just a question on the warrants is there any mechanism to settle the warrants and or even at the exploration of the warrants how do you expect to settle those one well the warrants are base. The fate of the warrants is in large part.
In the hands of the warrant holders they get to choose when they want to exercise.
Now once they make that election.
Then we have a choice of houses settle those warrants.
We can either.
Several of them by delivering them units.
Or we can sell them by paying them the.
The value of the in the money.
<unk> of those units so to the extent the.
Market price of the units is higher than the exercised price of the warrants we can pay that differential in cash if we want to and so our decision on that will be when we are.
Given a notice to exercise warrants by the warrant holders our decision on that will be to determine number one do we have the liquidity to pay in cash versus in versus issuing units.
And number two do what do we believe the intrinsic value of the units are.
And is the intrinsic value of the unit.
Materially higher.
Then what the market value of the unit is and if it is then we would want to settle in cash as well. So if the units are less than the intrinsic value in our view and if we have the liquidity will settle in cash yes. Both of those items are not satisfied.
Then we would settle by issuing units just for frame of reference we did have an exercise of one tranche of units back in 2021 into 2021.
We chose to settle those units with the payment of cash.
Okay. One last question. Thank you for that detail.
Sure.
Regarding your <unk> efforts, you signed a couple of agreements and had some upfront payments I think.
And is there a time when you expect that you have visibility.
<unk> to receive recurring revenue from those <unk> deals.
That in theory, there will be this is a great question. It's one that I don't think anyone can answer not just in <unk>, but that anyone in the industry.
This is this is our view.
These.
If the CEO to sequestration business.
Develops as a business globally.
Globally.
It becomes a.
A functioning.
Viable business that has many players that are emitters that are capturing their emissions. It has developers that are capturing emissions of others and then being paid a fee to handle transport and then sequester. The cotwo ground if that happens if the industry truly develops which will take.
Years to do I would guess 345 or more years to develop.
If they develop we believe that it is.
These two projects that we have with oxy and with <unk>, which has now been Mary Exxon. We believe these projects will reach a point in time, when there will be visibility and actually very predictable income from the deal could be quite quite material.
But it's a bit of a conditional probability as to whether we'll receive that type of income because the first thing that has to happen is the industry has to develop.
Now I do know that that from what's been announced publicly.
That both Exxon and oxy are.
Excuse me Denmark.
Oxy or both aggressively moving forward with their build out of their C. O two sequestration activities.
And they are active on our projects.
But.
It's we really have to see the industry evolve.
In order for.
These projects and what I think will be other projects on the other $3 3 million acres, we owned them.
C O two sequestration acreage in the Gulf Coast.
I call. These.
Some of our call options on greatness they cost us nothing to maintain we actually get paid a a.
Nice nice small small, but nice amounts of money by the operators to keep these leases.
And that the industry doesn't play out brand.
They may not play out either but if the industry plays out they can be quite significant to the company to an RFP and it could be great. So their call options on greatness that are currently out of the money if you hit that.
Analogy resonates with you.
Yes.
Thank you and I noticed as you pointed out there are the Denver and oxy as a percent of your acreage, it's a very small percentage.
Are those potentially just the tip of the iceberg or are those the best locations and therefore.
The lowest hanging fruit or could it be again, so I would say that those are two two of our our better locations.
But we have a number of others like it.
And.
The tip of the iceberg question is interesting because if the industry takes off.
When you look at our acreage that we have and you can look on a map on our website and you can see the acreage we have.
It's all in the places that you want acreage to be it has the right geology. It has the right geographic location, meaning it's close to emission sources.
And when you combine that with the legal ownership, we have which means that.
In every state in the United States. It is it is unclear as ambiguous as to what property owner has the right to grant to a lessee.
The right to store C O two in the subsurface.
There's questions as to whether it's the mineral rights owner, maybe it's the water rights owner and then them or maybe it's the surface owner and in most places there are not large contiguous tracts of acreage and by when I say large I mean.
Of of acres square excuse me thousands of square hundreds of square miles or tens of square miles. There's very few places where there are large contiguous tracts of acreage that are owned and see which means the owner owns all the rights from surface to the center of the Earth and therefore clearly.
He is the one with the right to do it.
Our three and a half million acres, where we have the C. Questioners titration right is rather unique because <unk>, we have the specifics right to sequester in the sub surface and to use the surface that is necessary to exercise those subsurface rights.
Which means that for example.
And operator, and we've had this happened already twice is able to.
Achieve with the stroke single stroke of the pen.
Close to a 100 square miles of contiguous acreage, where they have both the absolute right to sequester the carbon.
So we think that if this industry as a whole develops and moves forward as perhaps Exxon may think it does because of these large investments <unk> been making in carbon neutral initiatives as oxy, apparently feels they what they do because of all the investments they're making in Danbury.
As well if the industry develops.
We think that more and more of our acreage is going to become attractive and will be likely sources of sequestration of Sidoti, but theres a lot of ifs in there.
We are unable to predict and frankly, the developers who are putting all the capital out are unable to predict right now, but it is we.
Our well positioned if in fact and we're unique.
In the nature of our ownership, we are well positioned in unique if if this industry develops so we're watching it and I'm sure everybody on and hoping that it moves in the money and very lastly on the Denver and Oxy deals I'm sure you guys have kind of penciled back of the envelope what it may be it could be if it gets going.
A couple of years out I mean, what what amount of dollars or are you thinking even if it's a wide range of those deals might generate in terms of what we have done that but I'd say its a lot more than penciled it in before we did it.
We just can't I can't give you that guidance, we're just not going to step out on that land. My lawyer would would kick me in the Shannon if I did it but it is material. Okay. Thank you very much you bet.
Good questions.
I would now like to turn the call over to Craig Nunez for closing remarks.
Thank you very much.
Really.
I want to express again, what we talked about earlier here. Thank you to all of you who have been with us for a long time.
We've been through some difficult times, we're not.
Completely at the album out of the tunnel that we entered into eight year eight plus years ago, but we see light at the end of the tunnel and we are looking forward to achieving all the goals, we set out to achieve.
It seems like a long time ago now appreciate everyone's support appreciate your participation in the call your questions and look forward to continuing to do business with you in the future. So thank you everyone and.
Talk to you next quarter.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
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Okay.