April 05, 2013 - 4:46pm EST by
2013 2014
Price: 204.25 EPS $24.28 $0.00
Shares Out. (in M): 1 P/E 8.4x 0.0x
Market Cap (in $M): 147 P/FCF 0.0x 0.0x
Net Debt (in $M): -35 EBIT 29 0
TEV ($): 112 TEV/EBIT 3.8x 0.0x

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  • Coal
  • Illiquid


Pardee Resources offers something to hate for nearly every investor – it’s exposed to one of the world’s least sexy energy plays (CAPP coal), it’s illiquid, it’s gone dark, and for crying out loud, management doesn’t even want to talk to you (outside of the annual meetings, that is). 
By the way, I think this stock is a long.
To show that I haven’t completely lost my marbles I submit the following table.  Shares are currently trading at ~1.1X tangible book – basically the lowest multiple since 1997, and equal to about 6.4X LTM EPS, net of cash.  Those earnings come almost entirely from royalties.
Year Shares EPS DPS ROE ROA  
2012 718 24.28 11.60 14% 12% $5 special div.  returns depressed by large net cash position
2011 719 29.04 6.00 19% 16% returns depressed by large net cash position
2010 713 29.98 5.50 23% 19%  
2009 707 16.63 4.00 25% 12%  
2008 720 27.09 3.35 28% 22%  
2007 723 18.29 3.00 23% 17%  
2006 744 13.67 2.64 20% 15%  
2005 753 13.41 2.24 23% 15%  
2004 766 9.98 2.21 19% 12%  
2003 774 7.75 2.25 16% 11%  
2002 770 5.82 2.16 13% 11%  
2001 768 6.49 2.26 15%    
2000   6.00 1.60 16%    
1999   3.50 1.50 10%    
1998   4.00 1.40 13%    
1997   3.70 1.20 13%    
1996   1.20 1.06 4%    
1995   2.50 1.00 9%    
1994   2.20 1.00 9%    
1993   2.00 0.80      
I’ve gathered the last 11+ years of financials for you since you’d have a hard time getting them otherwise:
As you can see, they publish a pretty comprehensive annual report each year (audited by E&Y since forever), as well as quarterly updates and notes to the annual meetings.  By the way, they’ve historically done a tender every few years, which provides liquidity. 

A simple, high-margin, low risk business

Pardee is a royalty-focused natural resource company with a long history.  Its roots are in the state of West Virginia, and to a lesser extent Louisiana, where the Pardee and Curtin families purchased land back in the 1800s.  Today they operate a purely royalty-based business in coal and timber by negotiating royalties for production on these lands, as well as on recently acquired land (still mostly in West Virginia).  Their oil & gas business is similar, except that it’s not purely royalties as they sometimes take working interests in wells.  In recent years, Pardee has invested in solar power projects in CA and NJ that are similar to the royalty business model (ie minimal opex), except that pricing is locked-in.  Overall, operating risks are low and margins are high:  excluding income taxes, cash costs amount to just ~25% of revenues.


Philosophy and culture should be familiar to Buffett fans:

  •                 "We strive to have the discipline and patience to wait for the right pitch and to leave your money in the bank unless we see an opportunity to earn an attractive return." (2007 Annual Meeting)
  •                 "We will choose to leave our money in the bank rather than do a deal for the sake of doing a deal." (2011 Annual Meeting)
  •                 They’re patient: “we often consider investing in [timber] properties that require growing periods of 10 or even 20 years before harvest.” (2005 Annual Report)  “…can take as long as 5 years from when a coal property is acquired to production.”
  •                 Had 30 employees in 1991, as of YE11 they had 32.  Cash flow per employee has grown from $80K in 1991 to over $1M in 2011.
  •   Average employee tenure is over 17 years.  Chairman William Foulke and CEO Carleton Erdman have been with the company since at least FY02 (as far back as I can tell).  In fact, Mr. Foulke’s father joined the company in 1938 and retired as Chairman in 1989.  Finally, a Curtin family member runs the timber segment to this day. 
  •   Every employee is a shareholder. 


They're good investors
Regarding management’s ability, one might ask if those high ROEs above could be due largely to the fact that Pardee has assets on the books at long-ago prices.  Basically, I think the answer is “not really”.  Yes, the book value of some of their land is probably understated.  But note that the ROE has been generally increasing over time.  If a low cost basis was the main factor you would expect to ROEs decrease as retained earnings were reinvested at modern prices.  And they’ve reinvested a lot.  In every resource aside from oil & gas, reserves are as large today as they’ve ever been.  In 2010, Pardee claimed to have invested $114M in new assets since 1995, and that these assets had generated a cumulative $120M of revenues and were on track for an expected pretax IRR of 20%.  Considering that Pardee’s total assets were only $118.5M at YE10, and considering the mid/high teens after-tax ROE, I’d say these guys got where they are by being really good investors. 
Similarly, one might ask if those high ROEs simply reflect a bull market in commodities.  Again, I’d say “not really.”  First, consider that these guys did a mid-teens ROEs back in the late-‘90s, which was about the worst time for commodity prices since I don’t know when.  Second, consider the timing on their recent major investments:

                $27.3M for the Powellton property in 2003, containing coal, natural gas, and timber (the prices of which subsequently rose quite a bit)

                $13.1M for the coal-focused Courtney property in 2007 (admittedly not a bad year for coal, but this deal has nevertheless returned a high-teens IRR so far)

                $26.7M for a coal property in NW Colorado in 2009 (a good year to buy just about anything)

                $13.9M for a timber property in central VA in 2010 (a terrible year for housing starts = good year to buy timber)

                $10.8M for solar projects in NJ in 2010 and 2011 (as I will explain, that was excellent timing)

Just as importantly, consider also when they didn’t buy.  Courtney was their only major purchase during the commodity boom years of 2004-2008.  Looking at their capex all the way back to 1995, I frankly can’t find any major blunders.

Finally, one might ask if those ROEs were just a mediocre ROA juiced by leverage.  I’d say definitely not.  Just look at how close ROA has been to ROE.  Pardee has rarely used leverage, never used much, and today sits on a huge pile of cash.


Earnings are depressed

Let’s get the bad news out of the way:

1)      The bursting of the housing bubble has taken down timber prices, causing Pardee’s timber ops to go from a steady $4-5M in operating income per year (pre-2008) to roughly breakeven.

2)      The bear market in natural gas has driven oil & gas operating income from a high of $12.4M in 2008 to under $1M today.

3)      This leaves the coal ops to generate nearly all of operating income today ($29.3M in 2012), and thermal coal prices have suffered along with natural gas.  To a lesser degree, the slowdown in China has pressured metallurgical (met) coal.    Production is down YOY, and it will drop again (other things equal) when their Colorado property is depleted around the end of this year, meaning a roughly $8M headwind to operating income in 2014.


Now for the good news:

1)      Much of their coal reserves are low cost, and nearly all the currently leased reserves are leased to well capitalized operators, which should help to avoid further declines in production.  Per management on 2/15/13: “it appears that the worst is behind us in terms of coal mine closures in Central Appalachia, as our coal lessees continue to benefit from strong exports, especially to Europe, where relatively high natural gas prices give coal an advantage…” 

2)      20% of reserves are higher-priced met coal, and the production mix continues to shift in that direction.  Met was 39% of coal royalties in 2011 versus 19% in 2008.

3)      Housing starts are finally bouncing back, and Pardee bought more timberland during the bust.

4)      Good things happen to patient contrarians with lots of cash.  Moreover, they’ve shown themselves capable of learning new tricks.  For example, the Colorado deal was their first coal investment outside of Central Appalachia, and should produce an IRR in the high teens. 

Roughly speaking, I think operating income should benefit by $2-3M over the next few years from a higher % of met coal.  Eventually, timber should at least get back to the $4-6M it did before the housing bubble. 

Then there’s the $34.6M in net cash ($48/share) that I estimate they’ll have by the end of March, which is currently earning next to nothing.  Assuming they invest that for an aftertax 15% IRR, that’s an additional $8M (34.6*.15=5.2, grossed up by (1-35% tax rate)).  15% ought to be a realistic IRR, since it’s below their historic ROE, and since it’s equivalent to the current earnings yield on their shares, net of cash.  They could always just do another buyback or tender offer, as they’ve done numerous times in the past.

Together, that’s at least $14M of incremental operating income – more than enough to offset the $8M drop in operating income from coal.

Then there’s the income from the $29.7M they’ve invested so far in solar assets.  Admittedly, I can only guess as to the returns on this until I can ask management at the annual meeting in May.  (More on this below.)

And maybe, just maybe, the bear market in natural gas (and coal) prices could be over.  Over the past 12 months, prices have gone from $2/mcfe to nearly $4 today.  I recommend reading utah1009’s 3/14/13 writeup on natural gas if you haven’t already.  (By the way, Pardee owns 8,800 acres in western PA, nearly all of which sits on Marcellus shale.)


A few words about solar

I’ll admit to being concerned when I first read that Pardee was getting into solar.  After all, this is a new industry for them, and it’s typically reliant on government subsidies.  But I’m not worried anymore.

First of all, they’ve basically locked in the revenues.  In New Jersey, these come from 1) power purchase agreements (PPAs) with commercial customers that spell out the per-watt price for the next 20+ years, and 2) solar renewable energy credits (SRECs) that have been sold to utilities based on 15 year contracts.  The utilities buy SRECs to satisfy regulations that require them to have a certain % of output coming from renewable sources.  While California doesn’t use SRECs, it does have production based incentives (PBIs) that pay a certain $/watt for the first five years.  And of course, plenty of power is sold to commercial customers under PPAs.

Also, the IRRs are likely pretty good.  Overlapping state and federal subsidies unexpectedly pushed the IRRs on commercial solar projects in New Jersey to the 40% range in 2010 and early 2011 – about the same time that Pardee was investing there.  (According to industry watcher Lux Research, New Jersey was the most lucrative solar market in the world at this time).  While the California market hasn’t typically been as lucrative, the IRRs on commercial solar projects are typically high single digits to low double digits today.  Those are unlevered returns, by the way.  I doubt it would be hard to get non-recourse debt for an energy project with no emissions, no fuel price risk, and guaranteed revenues.

Solar operating income was only ~$1M for 2012, but I think this still ramping up.  Given the returns for NJ and CA mentioned above, and given an opportunity cost in the mid-teens % (due to the share price), I think these investments will do just fine.  Management has repeatedly said that solar is performing at or above expectations.


FYI, the full 2012 annual report should be out in mid April.  The next annual meeting is scheduled for Thursday, May 17, 2013, in Philadelphia.

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I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Housing continues rebound, boosting timber prices
Natural gas prices continue (or just maintain) rebound, boosting revenues from natural gas production as well as supporting coal prices
They find something to do with that $48/share of net cash
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