This article was first published by TheStreet on December 26, 2014.
By Sarfaraz A. Khan
NEW YORK (TheStreet) -- This has been a rough year for coal stocks because of weak coal prices. The resolve by the U.S. and China to reduce carbon emissions by clamping down on coal consumption has not helped. But the 150-year-old Consol Energy (CNX) remains an exception.
That's because the Canonsburg, Pa., company has been monetizing its coal assets and increasing its focus on natural gas production.
So far this year, the global coal stocks, as represented by the Market Vectors Coal ETF (KOL) , have fallen by 24%. In the U.S., coal miners Peabody Energy (BTU) and Arch Coal (ACI) have tanked by 59% and 58%, respectively, while Alpha Natural Resources (ANR) has plunged by 77% this year. On the other hand, Consol Energy has dropped by just 8% in this period, settling near $35 when markets closed on Christmas Eve, despite all the fears related to its traditional business.
Consol Energy produces both thermal and metallurgical coal. The former is used in power generation while the latter, commonly known as coking or met coal, is used for making steel. Although the company generates a majority of its revenue from coal sales, the segment lacks any meaningful growth and its contribution to the total revenue has been decreasing.
In the first nine months of this year, Consol Energy's revenue from coal sales climbed by just 1%. During this period, coal's contribution to total revenue slipped from 62% last year to 56% this year.
Consol Energy's growth, on the other hand, has been driven by its natural gas business. In the first nine months of this year, the company's revenue from hydrocarbon sales increased by 42% while its contribution to total revenue, unlike coal business, has grown from 21% in 2013 to 27% in 2014.
This robust growth of natural gas business will likely continue in the future as the company is targeting 30% annual production growth through 2016, mainly from the prolific Marcellus and Utica shale formations that extends from Virginia to New York.
In his Dec. 11 report, Sterne Agee's analyst Michael Dudas wrote the company's low-cost assets would give it an advantage over other exploration and production companies in a depressed natural gas pricing environment. Natural gas futures have fallen by 29% this year and have dropped below $3 per mmBtu for the first time in nearly two years.
Meanwhile, Consol Energy will reduce its direct exposure to its coal business by spinning off major parts of its coal assets into two separate entities. The company said that it would spin off its met coal operations into an unspecified structure and would sell 20% of its stake in an initial public offering in the second half of 2015.
As for its thermal coal business, the company will create a master limited partnership, or MLP. This unit generates strong and reliable cash flows and is therefore, an ideal MLP candidate, Dudas wrote. The company will likely conduct an initial public offering of the thermal coal business by mid-2015, Dudas predicted.
When asked whether Consol Energy was moving away from its traditional coal business due to concerns related to coal's future prospects, Kate O'Donovan, the company spokeswoman, toldTheStreet in an email the company's decision is meant to improve the value of its coal assets. This will also allow Consol Energy to "deliver a corporate structure which improves the company's valuation," O'Donovan explained, "by providing a straightforward, sum-of-parts view of the inherent value of our three main business segments."
The formation of a new met coal subsidiary and a thermal coal MLP will also strengthen Consol Energy's balance sheet when it sells its interest to the public. The company could raise $300 million from the IPO of its met coal subsidiary, Dudas said. The MLP, on the other hand, will be valued at nearly $4 billion, as per Sterne Agee's estimates, which could enable it to raise $800 million if it decides to sell 20% of the units to the public.
