Consol Energy Inc. (CNX): Well-positioned to benefit in a tight Eastern market; maintain Buy - Goldman Sachs - 01/29/08
What's changed
Consol reported 4Q07 earnings, takeaways were:
(1) 4Q07 earnings of $0.04 were substantially below both ours and consensus’ estimates of $0.37 and $0.40 respectively on account of the Buchanan mine outage.
(2) Forward-looking guidance and commentary was very positive showing the strength in international markets has tightened supply/demand for Eastern coal.
(3) CNX announced that it made an offer to buy the remaining shares of CXG Gas at a 12% premium to yesterday’s close.
Implications
We maintain our Conviction Buy rating on CNX as we feel they are best positioned to benefit from a strong Eastern US and export market. While the shares have been strong, there is still upside given how tight the markets are for their coal.
Specifically,
(1) NAPP basin supply/demand looks to be tight as exports suck tonnage off the Eastern US and scrubber installs continue to happen,
(2) Export demand continues to be very strong as supply problems from South Africa, Australia and China limit European choices. Consol, as the largest US exporter and an owner of their own export terminal in the Baltimore port, is set to benefit.
(3) Gas business has the potential to outperform with strong gas pricing. We are updating 2008-2010EPS estimates to $2.53, $5.89, $6.39 from $2.74, $5.70, $5.84.
Valuation
We maintain our target price of $90. We derive our price target from an EV/EBITDA multiple on 2009 estimates as our primary metric as well as taking into account sum-of-the-parts and normalized P/E analysis. Specifically, we assign an 8.0X multiple (historical range is 4.2X-9.6X, with an average of 6.9X) x $2,284mn EBITDA in 2009 = 18,278 EV or $90/share. Catalysts: pricing news from US/Europe, Buchanan news, and earnings.
Key risks
(1) Supply/demand balance eases.
(2) Higher-than-anticipated cost/ton.
(3) Potential mine-specific problems.
(4) Lower-than-forecast coal/gas pricing. |
