Last evening I was sitting and electronically paging through the latest edition of Value Line while the MLB channel droned in the background. I happened to glance over the list of the worst-performing stocks for the past 13 weeks and saw that once again Consol Energy (CNX) was on the blow-up list -- with another 40% decline.
This stock has been a widow maker in 2015, as several well-known funds have loaded up on the stock only to see it plunge to unimaginable depths. David Einhorn and Mason Hawkins have been the hardest hit, as the stock has fallen almost 80% in the past year. While I have had my own energy-related beatings administered over the past year, I have kept position sizes small, so it is but a flesh wound, so far. Those who backed up the truck have sustained far more serious wounds.
Einhorn and Hawkins are the two largest shareholders of CNX, and both have lately commented on the stock. Einhorn gave a very elaborate power point presentation that suggested that Consol was incorrectly being punished for being just a coal stock. The company has a million acres of land in the Marcellus and Utica shale fields, with enough gas to fuel the entire U.S. for two years. Consol's management has been smart as prices declined, and the company has stopped drilling new wells. It will still see production growth as it brings wells online that have already been dug, but it will not build new wells that will be unprofitable. Einhorn thinks that is smart -- and so do I.
The expansive power point is widely available online, so I will make this long story short: Einhorn thinks that the coal assets, non-core available for sale assets, and holding of their MLP spinoffs of CONE Midstream (CNNX) and CNX Coal (CNXC), are worth about the current enterprise value of the company. That means an investor is paying nothing for the gas acreage and future income from the natural gas operations. Einhorn thinks those are worth another $6.5 billion at today's gas price -- and obviously a lot more if gas prices begin to rise in the future. That would take the enterprise value up to about $13 billion, and if no new debt is taken on, the equity value will go from around to $2 billion today to more than $8 billion of shareholder equity. While a fourfold return is nice, it is much more than that if natural gas prices go up over the next several years.
Mason Hawkins was not as detailed but in the LongLeaf Partners Fund quarterly update, he wrote: "Management is adjusting to lower commodity prices with cost controls and took steps to recognize the value of Consol's coal assets by offering shares in the master limited partnership (MLP) CNX Coal, which generated $200 million in proceeds. We filed a 13D during the quarter to discuss with third parties as well as management and the board a potential monetization or separation of the valuable Marcellus and Utica gas assets. We believe these assets alone are worth demonstrably more than Consol's total equity capitalization."
The fund update also said that LongLeaf's energy-related positions were down 60%, which is more an indication of a full-on crash that a bear market. There has been so much selling and shorting of energy companies that they now think the eventual recovery of these crushed and battered stocks will be a significant source of future returns. LongLeaf has consistently beaten the markets for years now, and if the firm is right about an eventual recovery in its oil stocks, led by Consol Energy, it will go back to the head of the pack.
Both Einhorn and the folks at LongLeaf have long track records of success. Both are very good at corporate valuation and measuring credit risk. Both have huge losses in shares of Consol Energy but are confident they will walk out with profits. Having been in this position several times in my career, I admire their conviction and find their arguments compelling. There are fortunes to be made following them into this stock, but if they are wrong, or oil and gas prices simply refuse to cooperate, there is a ton of money to be lost as well.
In Western lore, the Widow Maker was a horse that most could not ride -- and the majority of those who attempted to break him were left with shattered bones and lonely wives. Only the toughest, most skilled riders with high pain thresholds would even attempt to ride the Widow Maker. The few who succeeded earned fame and fortune.
Consol Energy is a widow-maker stock. If you are brave enough, patient enough and can stand a lot of financial pain, you could make a lot of money when this stock recovers.