Pardee Resources (PDER.PK) is a royalty company focused on coal, timber, oil and gas, and renewable energy. The company was founded based on land in West Virginia and Louisiana, and it collects royalties from companies producing coal, oil and gas, and timber from those lands. It has expanded into other states and renewable energy, and results from those forays have been very good.
The company operates a simple business collecting durable cash flows, and has an asset base that is sufficiently diversified to provide stability to those cash flows. The company is trading below the value of its constituent assets and that value is well covered by its cash flows. A summary of the company's resources appears below.
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Source: Pardee Annual Report
Coal
Pardee collects royalty income from coal miners when it owns the mineral rights to lands containing coal. The company's coal reserves are diversified by state (Virginia, West Virginia, Kentucky, and Colorado) and by type (Thermal and Metallurgical). In 2012, coal royalties provided the vast majority of the company's revenue, $39.0 million worth. The company had $11.9 million of coal related expenses, of which $9.5 million was depletion/depreciation which is non cash. This means the coal operations had EBITDA of $36.6 million. Some of the coal operations have short remaining lives, so capitalizing the coal EBITDA at 3.5 times is reasonable. That puts a value of $128.1 million on the coal operations. The coal operations are come from numerous different mines with different
Timber/Surface
Pardee's timber and surface revenues were $3.65 million in 2012 as compared to operating expenses of $3.35 million. This segment was only slightly above breakeven, and I believe surface rental income (for example, cell towers) supplied most of the profits. While timber is not losing! money, it was not a significant contributor in 2012. A lumber price index shows that prices were significantly higher in 2013 than 2012, although they have recently retreated to 2012 levels. This volatility in lumber prices provides upside opportunity to the shares, as PDER's lumber revenue will rise faster than prices. Higher prices will incite higher cuts on their land, and provide them a higher price per board-foot cut, giving them huge upside exposure to prices. Of course, because trees keep growing if not cut down, they can afford to wait out a period of low prices.
Even assigning no value other than option value to the timber rights, the company's 194,572 acres of land do have value. Even at $250 per acre, the land would be worth $48.6 million.
Oil and Gas
The company's oil and gas operations are also operating in a depressed market environment, due to the current low price of natural gas. The company has just under 10 bcf equivalent of reserves, and those reserves will become more valuable if gas prices improve. The are more profitable than one would expect for a small natural gas producer, due to royalty interest nature of some of their production. This segment of the business is also mainly an upside option.
The company also has a large block of un-leased land in Natchitoches Parish, an area prospective for natural gas with highly productive Haynesville Shale wells in the area.
Not accounting for any upside, the company's most recently reported 9.72 bcfe of reserves are worth at least $0.50 per mcf, or $4.9 million in total.
Solar
The company has recently expanded into owning solar panels attached to state electricity grids in New Jersey and California. The company invested $15.1 million and immediately received tax credits with a value of $6.5 million for a net investment of $8.6 million. These assets had revenue of $2.3 million during 2012, remarkable considering they were only purchased in March and September. Net of operating expenses for the panel! s, they e! arned $1..0 million. With a full year's earnings, I expect these investments will produce a return on equity of 15%+. It is very conservative to value them at their cost of $8.6 million.
The solar revenues are extremely stable, with long term contracts of 15-20 years signed with government entities in New Jersey and California.
Scalable
The company's business is very scalable. Because they do not operate the resource extraction businesses but merely collect cash flows based on the revenues of those operations, their overhead can remain low. The number of employees it takes to run the company has not expanded significantly as the asset base of the company has expanded, providing significant SG&A leverage.
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Source: Company Presentation
The company has numerous opportunities for increased revenue from its current assets, and it has proven its ability to make accretive acquisitions with excellent recent solar and coal purchases. This provides upside as the company should be able to earn a strong return on its cash balance and unused $30 million credit line.
Cash
The company has $29.7 million of cash according to its most recent annual report. At its most recent price of $232.50, the company has a market capitalization of $168 million. Netting off the $30 million of cash means the business is selling for $138 million. The sum of the parts analysis above put a total value of $190.2 million on the business, suggesting a significant upside opportunity. The diversified nature of the value and the significant hard asset base of the company also provides downside protection.
Dividend Growth
The company has been consistently growing its regular common dividend, which is now $6.80 per share per year. That has more than tripled in the last decade, and the company continues to grow its payout. It also made! a $5.00 s! pecial dividend last year, and has the financial ability to make additional payouts. The current yield of 2.8% provides a stable income stream while investors wait for the intrinsic value of the company to be realized, or for any of the numerous upside catalysts to occur.
Risks:
Pardee is a dark company. They do not file financials on Edgar, but will send them to those who demonstrate they are shareholders. The stock trades a small number of shares a day, but volume is sufficient for most investors to build a position. Limit orders should be used in all cases.
Disclosure: I am long PDER.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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