WEDNESDAY, DECEMBER 1, 2010 - Barrons Weekly
CONSOL Energy's Upside Potential
Raymond James argues that shares of the coal and natural gas producer can gain close to 50%.
online.barrons.com
(Note: Subscription required but just Google the article title for the link to the full article)
From the article"...Our new target price of $60.00 is derived using a sum-of-the-parts valuation..."
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"...We believe the current market value of CONSOL Energy remains sharply below what we consider the long-term asset-value potential is of the coal, gas, and other inherent assets within the company. First, we attempt to value CONSOL Energy's exploration and production (E&P) assets on what we deem as conservative estimates applied to its acreage position and proved reserves, reaching just over $8 billion...."
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"...we are increasing our 2011 earnings-per-share (EPS) estimate from $2.35 to $2.65 based on a slightly higher price assumption and we are introducing our 2012 EPS estimate of $3.70...."
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According to the article, management is looking at the possible sale or joint venture deal for their over 300 million tons of met coal reserves located in Southern West Virginia (Central Appalachia). This represents only 20% of their coal reserves. Based on the potential $350 Million/year Ebitda this mine could generate once developed. Value @5X EBITA? Maybe $2 Billion ?
The company owns 750K acres of Marcellus shale properties (third largest land owner there). Previous sales/leases were at $10K/acre. This asset could be worth $7.5 Billion
An argument could be made that these two assets alone might be worth $9.6 Billion or $42.00/share.
If you add in the potential value of their other 80% coal mining interest(s), their current NG production (and gathering infrastructure) from producing wells, their other non-coal land interests and the BV of the companies fixed capital assets (BV=$3 Billion) AND back out the company's $3.6 Billion long term debt, the author suggests their remaining assets are worth $18.00/share or another $4.05 Billion.
Based on Friday's close( CNX $45.20/share), the market values these other pieces at $720 million total or $3.20/share.
So, is CNX undervalued by 42% (or more?).
I do know, that if management inks a few JV deals for both their coal mine operation located in Southern West Virginia and one or more NG driller(s) and/or operator(s) (including an operator for their NG gathering business) for their Marcellus shale properties, shareholder value should increase. Many of these JV deals could then be spun off for cash or MLP's interests similar to what Williams Companies, Inc. (WMB) does with Williams Partners L.P. (WPZ). Will we see a CONSOL Energy Partners L.P. soon?
I have been building a position in CNX since 03/2010 with buys ranging from $35.00/share - $48.00/share. My average cost is now $42.00/share and was thinking of selling some covered calls to lock in the recent gains and provide a hedge for my higher price shares. Based on this article, I might hold off on writing any covered calls soon.
EKS
FWIW on Friday, the CEO of Massey Energy Co. (MEE)( suddenly announced he would step down and this coal company is now on the block to be sold. MEE has 1/2 the market cap of CNX.
Massey CEO Will Retire, Making Sale More Likely
online.wsj.com
This sale should spur interest for other sales (especially from large Chinese investors). |
