From analyst Michael Dudas of Sterne Agee on how Antero Resource's stock sale may benefit CONSOL Energy, too:
CONSOL ENERGY (NYSE: CNX) RATING: BUY
Price Target: $60.00
Analysts: Michael S. Dudas, CFA / Satyadeep Jain, CFA
Antero Excitement Positive as Market Waits for Asset Direction - Reaffirm Buy Rating
We believe the read-throughs from Antero's successful road show and strong rally on its first day of trading are positive for Consol. We expect asset monetization announcements from CNX shortly. Consol's shares should continue to find support, especially as potential upcoming catalysts highlight inherent value. Shares remain our top pick in mining space.
Antero IPO. Antero Resources (AR, $52, NR) appears to be a very close proxy for Consol, and therefore we believe the read-throughs from Antero's successful road show and 18+% rally on its first day of trading are positive for Consol. Antero has a concentrated portfolio in the Marcellus Shale (330K net acres in Marcellus's southwestern fairway) and the Utica Shale (100K net acres). Consol has 347K net acres in Marcellus and 83K net acres in Utica. My colleague and Sterne Agee E&P Analyst Tim Rezvan believes it is difficult to ascertain a precise EV, but it appears that the EV for Antero should be nearly $12.5B, growing toward $14B in 2014 from an announced FCF overspend. Based on current price and comparable metrics, we believe CNX's coal assets are trading at $7.0-7.5B based on normalized pricing and volumes, implying in current valuation $3.0-$3.5B for Consol's gas and other assets. Antero deserves a higher valuation vs. Consol's gas assets given Antero's long and more active record, but almost 4.0x valuation for Antero vs. CNX gas leads us to believes CNX's gas assets are undervalued.
Utica Activity - Tim has indicated that acreage prices have spiked in Ohio, apparently driven by aggressive leasing by Aubrey McClendon's private company American Energy Utica LLC (AEU) as commentary from multiple operators confirms that AEU has been bidding up to $17K/acre for wet gas acreage and up to $8K/acre for dry gas acreage. Greater activity in Utica bodes well for CNX's Utica acreage valuation, in our view.
Potential Monetization - Last quarter, management announced that its board is also evaluating corporate structure to unlock additional value for shareholders. We should see an asset sale announcement this quarter, as well as further information on potential restructurings. As an asset rich company, we believe management has many avenues to recapitalize its coal and related businesses.
Investment Summary - As its coal business begins harvesting and shale monetization continues to grow rapidly, Consol's shares should continue to find support, especially as potential upcoming catalysts highlight inherent value. We support our $60 target using asset valuations for its coal and gas businesses, which reflects a sum-of-the-parts analysis – 7.5 multiple to our 2015 coal EBITDA forecast and a combination of valuation multiples on various gas assets.
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest may be found by clicking on the report link below
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Rig Count Interactive Map by Baker Hughes, an energy services company.
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People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.
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Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.
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