Consol Energy, (NYSE:CNX) could rip if natural gas rebounds to above $4. Why CNX? Because the stock does not trade week by week with natural gas prices like many pure gas players do. Instead, the stock languishes whenever natural gas prices are below $4 even if coal stocks are rallying. If natural gas rebounds, CNX could snap back with it. First and foremost, Consol Energy is a coal company... at least that was true until recently; today that statement is debatable. In addition to a storied coal franchise dating back more than a century, CNX has a valuable gas business that's under-appreciated by investors.
Speaking of coal, CNX dominates northern Appalachia, (NAPP), where it produces the highest btu coal in the country. In the past year, CNX has been able to sell its high btu thermal coal as low-grade coking coal into China. The exact same coal that's sold domestically to utilities is being exported to China at a $15 per ton premium netback. The margins on this coal are strong and more sustainable than investors may realize. Even though this NAPP coal has only marginal coking coal qualities, it's by far the cheapest option for the Chinese to use in their blast furnaces. To be clear, China can't substitute high- or medium-quality coking coal for Consol's coal, not even close, but at the margin China can cheat a little bit.
An increasing number of Chinese blast furnaces are testing Consol's coking coal. This coal may only be 5%-10% of a blend at any given furnace, but there are of course hundreds of furnaces in China. Since the delivered price of CNX's coal is substantially below that of any other low-quality or cross over coking coal, once it gets into the mix it tends to stay in the mix. This key aspect of the Consol coal story is perhaps the least well understood. Investors appear to be largely unimpressed by the prices received by Consol for this newly minted coking coal, but the margins are quite good and CNX is beginning to sign longer-term contracts.
Consol also has one of the most valuable coking coal mines in North America. Recall that coking coal comes in a range of qualities. Walter Energy has top tier, low-vol hard coking coal on par with the best coals from Australia's Bowen Basin. The quarterly benchmark coking coal settlement is indexed from this high quality coal found in few other places but Australia, western Canada, Mongolia, Russia, Mozambique, and the U.S. In the U.S. this coal is only found in Walter's Alabama mines and in Central Appalachia at Consol Energy's Buchan mine. This mine produces 5mm tons of premium coking coal a year, compared with about 7mm tons coming out of Walter's Alabama operations. Despite the mine producing only 5mm tons, CNX is a top 12 global exporter of this coal into the seaborne markets.
Less well known to the market is that Consol has a valuable natural gas business. The value of the Company's natural gas operations has been demonstrated in recent months by 2 blockbuster joint ventures. Each dramatically de-risked a critical shale play for the Company. Consol has signed joint ventures with Hess (NYSE:HES) and Noble (NYSE:NBL) for the Utica and Marcellus shale plays in which CNX has large acreage positions. Each joint venture is for a 50% interest in the respective area. The joint venture deal metrics imply a combined value of at least $7-$8 billion for the Company's Utica and Marcellus assets. Importantly, not all of the Utica acres were included in the JV with Hess, so there's still incremental un-realized value in the Utica. There's also about 3 T of proven natural gas reserves that are conservatively worth a few billion.
Despite these 2 important joint ventures that validate the Company's shale plays and provide abundant cash funding, CNX stock did not move as much as I believe it should have. Even after CNX reiterated its 3rd quarter coal guidance while peers were missing targets left and right, the stock languished. I believe that once natural gas rebounds to a $4 handle, the Company's natural gas assets will be looked at in a fresh light.
Finally, it should be noted that Consol owns or controls a lot of infrastructure, most notably the Company's 100% owned Baltimore, MD., port facility and storage and pipeline assets that are easily worth another $1 billion. Consol also controls the surface rights on millions of acres, giving it an important say in new infrastructure that will need to be built in coming years.
Before even considering the coal segment, the non-coal assets are comfortably worth $10 billion. The coal operations described above will generate roughly $2 billion of EBITDA next year. Ascribing a 5x normalized multiple to this cash flow equates to another $10 billion of value. Subtracting out net debt and legacy liabilities, the firm's equity value is comfortably above $14 billion, which is about $60 per share. Recent analyst price targets range from $45 to $78 and average about $62. CNX stock below $40 per share is a steal. The stock is trading at a material discount to the sum of the parts. Stocks trading at considerable discounts to NAV frequently continue to trade that way until a catalyst emerges. For Consol, that catalyst may be the spinning off of its natural gas business next year. CNX has not announced any spin-off, but if the Company continues to get no respect, that option will get a lot of airplay fairly soon.
Disclosure: I am long BTU, CNX, WLT, PCX, ANR.