Talking My Book: Rhino’s Uticatalyst

Rhino Resources (RNO), an MLP so small it’s not in the Alerian MLP Index, released news about its Utica acreage yesterday.  RNO is predominantly an operating coal company in a time when spot steam coal prices are dropping along with natural gas prices.  It carries a 9.3% current distribution yield.

RNO gets lumped in with another small, relatively new MLP that mines coal: Oxford Resources (OXF).  OXF has seen its business deteriorate in recent quarters more than other coal operators and has seen its price drop 40% so far in 2012.  RNO is more than twice as large as OXF in terms of market cap, but OXF actually sells more tons of coal (4.9mm for RNO in 2011, 8.5mm for OXF).   So, its not too surprising that RNO would trade down in the face of weak earnings from OXF and weak trending commodity prices.

The one unknown potential catalyst for RNO has been the 10,000 acres of land in the Utica shale it purchased before the Utica buzz really began.  The best performing MLP in 2011 was EV Energy Partners (EVEP), after investors realized the Utica acreage it held was going to be very valuable.  RNO investors like me are hoping for a mini-replay of the EVEP story from last year.

The deal announced yesterday was for 1,500 of RNO’s 10,000 net acres.  Chesapeake has agreed to pay RNO $9.0 million up front ($6,000 per acre) plus a 20% royalty on future gross proceeds received for oil and gas produced from that acreage for a five year term, with a three year option.  (Press Release)

RNO has disclosed previously that it owns 1,500 acres outright, and then acquired an additional 8,500 net acres with a group in 2011, paying $20 million for its net 8,500 acres.  The Chesapeake deal must be on the 1,500 acres the company owns outright.  If the group that collectively owns the rest of the acreage RNO is involved in were to execute similar lease arrangements on the remainder of its acreage, RNO would stand to collect an additional $51 million in up front fees, plus royalties.  That’s a fantastic return for RNO.  The $9.0 million in fees alone will increase EBITDA by 11%.

In the last few days (as shown in the chart above comparing RNO with OXF and the MLP Index), RNO has started to rebound sharply, perhaps the bounce was just a reaction to overselling last week…or perhaps it had something to do with this deal.  I purchased RNO for clients right before the end of 2011, betting on its valuation attracting buyers in 2012 and the potential Utica catalyst.  So, it wasn’t me bidding it up this week, and it won’t be me buying today, but I will be smiling…

Related: My list of Utica Puns, Uti-Can You Dig It?

Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.  Long RNO.

Category MLP Market Post