Consensus View: CNX has attractive acreage and reserves but trades in line (6x ’18 cons EV/EBITDA) with similarly situated peers.
Variant Perception:
(1) CNX recently spun off coal business focusing exclusively on proving out reserves on its extensive Marcellus footprint and consolidated in its midstream business. Pattern recognition suggests CNX are making strategic moves indicating they are getting ready to put themselves up for sale (single basin, control of infrastructure, reserve depth). Greenlight ownership increases sale likelihood.
(2) The basis differential right now between Marcellus and Henry Hub is ~70 cents due in part to takeaway capacity bottlenecks. This will be alleviated over the next couple years as midstream finishes its buildout of several pipelines under construction. CNX and their Marcellus peers should gradually realize a higher price for their gas. For every 10 cents increase in net revenue to CNX, ~$50mm should drop to EBITDA. Capitalized each $50mm in EBITDA is worth ~$1.50/share.
Overview: CNX is a natural gas E&P with operations in Marcellus and Utica. 2018E production was 520-550 Bcfe (10% liquids). Post recently completed transactions, CNX Resources is guiding to ~1.5Bcf/d of natural gas production utilizing 13,000 net wells on 600k acres entirely focused in the Marcellus basin. They currently have 7.6 Tcfe proved reserves, which is equivalent to ~15 year reserve life. 2018E Capex guidance is $790-880mm and 2018 EBITDA guidance is $845-895mm.
Capital Structure: $2.2B in gross debt which is trading at or above par and ~6% YTM. $200mm pro forma cash (after CNXM transaction), $2B net debt. Southeastern owns 24% and Greenlight owns 8% of the equity.
Recent History:
Feb 7, 2018 – dropped WV gathering system into CNXM
Jan 3, 2018 – acquired GP interest in CONE Midstream and renamed CNXM for $305mm in cash
Nov 28, 2017 – completed spin of CONSOL Energy (CoalCo), changed named to CNX Resources
Valuation:
Bull case: M&A buyer gives credit for 30 cents higher net revenue adding $150mm to high end of EBITDA guidance and pays 7.4x EBITDA: 70% upside.
Base Case: No transaction, company trades at 7x mid-point 2018 EBITDA guidance: 20% upside.
Bear case: Use your imagination here on how low the price of natural gas can fall and stay. The company does hedge substantially all natural gas commodity risk one year out, and significant quantities 2-5 years out, but regardless an investment in CNX exposes you to the vicissitudes of the natural gas commodity cycle. CNX traded as low as $6/share in early 2016, during the energy sell-off. Spinning the company of the coal assets last year does reduce long-term regulatory risk.
Natural Gas E&P Comps:
