CNX Gas Ready to Rise

Includes: CNX, CXG
by: Hilary Kramer

Coalbed methane [CBM] isn’t exactly a household term, so many of you may be unfamiliar with CNX Gas (CXG). This company, which was split off from CONSOL Energy (NYSE:CNX), a coal-mining company, liberates the methane in coal beds and develops it into natural gas. Back in the early 1980s, mining companies started releasing methane before mining coal as a safety measure, and it then became clear that money could be made from this methane. In the case of CNX Gas, the company split off from CONSOL, which still owns 81.5% of CNX Gas stock, so as to focus its strengths on the methane side of things.

Most of CNX Gas’s reserves are in Appalachia, and they’re enormous. The company has expanded well beyond CONSOL’s reserves, and as of December 31, 2005, CNX Gas had 1,130.4 billion cubic feet of proven reserves. 99% of this is CBM and 49% is proved developed. The reserve life on the proved reserves is 22.5 years.

In short, this is a company with a strong future, and its growth in the past two years reflects this. 2005 saw 50% growth over 2004, and the first quarter of 2006 showed a 40% growth over the first quarter of 2005. CNX Gas’ pre-tax and net profit margins are twice as high as the industry average, and analyst estimates for the rest of the year are strong.

So it might be fortunate for you that the second quarter of 2006 wasn’t as spectacular as the prior few quarters, and the growth was only 10% over 2005. Perhaps this has something to do with the stock price, which is now trading near the bottom of its 52-week range. Back in the summer, CNX Gas was trading in the low $30s, and just a month ago it was in the high $20s. Lower natural gas prices are probably the culprit.

But now it’s in the low $20s, and I think it’s time to buy. With its extensive proven reserves and its $3.3 billion market cap, this company isn’t going anywhere, and I think there’s a deal to be had.

Type of stock: A natural gas company with extensive proven reserves that’s coming off a bad quarter.

Price target: Given the current low point, I think I’d grab this one now. It could drop below $20 and you might make more money, but other analysts are rating it a strong buy, and you might miss your chance if you wait too long. I am going to buy and this stock represents a major bet I am going to take.

CXG Chart Since Spinoff

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