From New York-based Sterne Agee analysts on Consol Energy:
Michael S. Dudas, CFA (646) 376-5329 / Satyadeep Jain, CFA (646) 376-5357
Cash For Gas - Partial Coal Asset Monetization Bringing More Clarity to Consol's Long-Term Plans - Reaffirm Buy Rating
We expect investors will increasingly support this current step regarding Consol Energy's emergence into an energy growth vehicle. Generating a higher than expected value for a portion of its capitalized, non-core thermal coal assets while de-risking its balance sheet and providing accretive growth capital for its shale holdings should allow valuation to improve as coal and natural gas markets normalize. We would add to positions.
• Value for Non-Growth Assets. Management appeared to facilitate a very well-matched sale for its well-capitalized thermal mines while retaining very strong, flexible, and higher value operations. Securing cash, future royalties from select mines, and relieving itself of legacy obligations provided a well-structured transaction for stakeholders, in our view.
• Hidden Value Emerges. Management has consistently communicated its desires for the market to apply more appropriate values its coal/related assets and to provide more visibility to the growth potential of Consol's Marcellus and Utica Shale holdings. During the past eighteen months, Consol's equity valuation has well outperformed its coal, but underperformed its shale peers. While not the best of times to sell coal assets, the valuation applied by the purchaser, privately owned Murray Energy, serves to validate a portion of management's desire.
• Execution the Key. As management continues to work on one or two other asset monetization transactions to further recapitalize its company during the current quarter, we expect the market will place increased focus on its reserve positioning and growth as well as drilling, infrastructure, and gas production growth plans relative to its Eastern shale-oriented peers
• Lots of Moving Parts; However, More Value Remains. Our initial analysis of the transaction, balance sheet, and EBITDA adjustments supports shares that remain underpriced at current levels. We believe that as additional, but smaller sized, non-core asset sales emerge, thermal and metallurgical coal market prices normalize and Consol's shale profile achieves targeted growth, the valuation gap should continue to narrow during the next 12-18 months.
• Tomorrow morning, Consol Energy reports Q3 2013 results and senior management plans to meet with investors and analysts in NYC.